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Is locavesting the next logical step for small business financing

Brian O'Connell on January 17, 2012 Source: Kauffman Foundation

Now here’s a line that should draw the interest of cash-strapped healthcare small business CEOs.

“What would the world be like if we invested 50 percent of our assets within 50 miles of where we live?”

It’s the central theme – and the opening line of the last section – of the new book, Locavesting: The Revolution in Local Investing and How To Profit from It.

The tome, written by New York City-based business writer Amy Cortese, hangs the solution to small business financing on an interesting peg – the fact that business lending will grow by 66 percent in 2013, but that a huge chunk of that money will be misallocated or sent to businesses that will shutter their doors with little lender oversight.

In the book, Cortese cites data from one corner of the financing world – peer-to-peer lending – that shows that increasingly, banks won’t be any part of the lender-borrower connection in the future.

Analysts at the Gartner Group  project that P2P (Peer-to-Peer) lending will expand…to $5 billion in loans worldwide. The brisk growth…will be driven by investors seeking higher returns and borrowers shunning (or being shunned) by banks.

Cortese’s idea is that keeping banks out of the small business financing equation has merit, but the larger point is that local communities are a far better source of financing for startups than banks.

Like real estate, Cortese says the answer lies in three words: location, location, location:

We buy local and eat local. So why is it so hard to invest local? The truth is, our financial markets have evolved to serve big business, a fact only underscored by the recent financial crisis and bailout… In catering to those companies deemed “too big to fail,” we’ve created a new group that could be labeled “too small to succeed.”

The author underlines the central point that huge multimillion-dollar campaigns encourage people to “buy local,” yet there is no similar effort to convince local communities to invest locally. But it’s a point that community leaders should be pounding away at:

Just as Buy Local campaigns have found that shifting as little as 10 percent of spending towards locally owned firms can generate outsized economic impacts for a community, so, too, can shifting some of our investment dollars. Locavesting is a call to invest once again in the innovative engines of job creation and growth: small business.  

As the book’s summary promises, Cortese takes you across the U.S. to small towns where local investing has actually been put into place – with apparent success. The book points out:

  • How the Internet and social media are creating new opportunities for entrepreneurs and individual investors to connect
  • How companies have sold shares to loyal customers directly, bypassing Wall Street middlemen
  • How communities are working to bring back local stock exchanges that once again serve local companies and investors

The author does admit that the odds, as they’re stacked right now, are working against the idea of local investing, but that’s just because of the way the laws are written.

(Local investing) is actually not that easy to do. Our securities laws, which were crafted nearly 80 years ago, make it very difficult for investors who are not super wealthy to put money into private businesses, and for those businesses to reach out to their communities. It’s easier for most people to invest in a company half way around the world than one in their own backyard. And that’s a shame.

The “Locavesting idea” is a provocative one, and is already being manifested (to some degree) by the burgeoning peer-to-peer lending movement. But that’s only part of the story.

As Americans grow even more weary of the operating practices of banks and investment companies (especially big ones) there’s a vacuum developing  – and community-based small business financing operations, as described in Cortese’s book, can be a big part of the solution.

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