How To Raise Local Capital

Finance is being disrupted. Impact investing is going local. And community capital is on the rise. From local investment groups to socially minded angels and lenders, and direct public offerings to crowdfinance, there is a whole world of kinder, gentler finance out there. You just need to know where to look. That’s why we’ve put together this handy guide of funding options (in alphabetic order). 

ANGEL INVESTORS 

Angel investors are wealthy (accredited) individuals, often retired entrepreneurs or executives, that take an interest in startup investing. They often have a particular interest, such as technology or food ventures. As the field has grown, individual angels have organized into groups to share deal flow and due diligence (the vetting of companies). Today there are angel networks across the country. Angels fill a critical gap between friends & family funding and venture capital. They typically take an equity stake, or debt that converts to equity. (read more)

BUSINESS DEVELOPMENT COMPANY (BDC)

A Business Development Company (BDC) is a type of publicly traded company that makes investments in small and mid-sized businesses. In a way, a BDC is like a venture capital fund, but one that is publicly traded on the stock market and accessible to ordinary investors. They’re rare. But in the right hands, BDCs hold a lot of potential for small businesses looking to access public funds. (read more)

BUSINESS PLAN COMPETITIONS

B-plan competitions are often hosted by public libraries, universities, corporations, incubators and other organizations and award cash to the winning business plan(s). For entrepreneurs just starting out, this can be a great way to jumpstart your venture. (read more)

COMMUNITY BANKS & CREDIT UNIONS

Community banks have traditionally been a key ally of small business, making a disproportionate share of small business loans. And they are more likely to lend you money then that global bank. The same goes with credit unions—non-profit financial cooperatives owned by their members/depositors. (read more)

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS (CDFIs)

Ignore the ungainly name, because CDFIs are valuable allies of small businesses. A CDFI is a class of financial institution that caters to underserved and often low-income communities in a region. Certified by the Treasury Department, they can be banks, credit unions, venture capital funds or loan funds.  Many CDFIs have revolving loan funds that target a specific state or geographic region, making low interest loans to small business owners and micro-entrepreneurs that might not qualify for a bank loan. (read more)

COMMUNITY-SUPPORTED ENTERPRISE

Looking to smooth out seasonal dips, manage cash flow or finance new equipment or a remodeling job? Before you go to a bank, you might want to consider your customers. If you have a loyal following, your customers may choose to pay up front, creating a credit or house tab that they can use towards future purchases. The best known example of this type of pre-selling is Community-Supported Agriculture, or CSAs, where people pay up front for a weekly share of a farm’s harvest. In recent years, the CSA concept has expanded to community-supported books, fisheries, beer, art and more. (read more)

COMMUNITY FOUNDATIONS

Community foundations are independent grant-making institutions that seek to broadly improve the quality of life and economic conditions in a targeted geographic area—think of them as a community fairy godmother. These local foundations raise and pool funds from public and private donors within a specific community. Among their activities, they make grants to organizations and projects addressing local needs. Since the financial crisis, that has increasingly included job creation and entrepreneurship. (read more)

CROWDFUNDING

Crowdfunding is a new and evolving fundraising alternative that marries social media and finance. With crowdfunding, entrepreneurs reach out to the “crowd”—including their friends, customers, supporters and social network—for funding. The idea is that lots of small investors or backers can take the place of one or two large investors or patrons. Another benefit: you build an engaged group of supporters and evangelists. Crowdfunding comes in different flavors:

Rewards-based crowdfunding

Title II “Accredited Investor” Crowdfunding

Title III “Regulation Crowdfunding”

Regulation A+ “Mini-IPO”

Intrastate Crowdfunding

(read more)

CORPORATE PROGRAMS

Don’t overlook the largesse of benevolent brands. Socially-minded companies such as Boston Beer (aka Sam Adams), Whole Foods and others offer funding and other support for entrepreneurs. (read more)

GRANTS

Yes, there is such a thing as free money! Well, sort of. Grants are increasingly available to for-profit companies, but they often come with strings attached. There are two main sources of grants: foundations and the government (federal, state and local). (read more)

IMPACT INVESTORS

Investors big and small are increasingly investing in companies that have a positive impact in the world, whether that is environmental, social or economic. And foundations that used to only give money to nonprofits are now making mission-aligned investments in for-profits as well. (read more)

INCUBATORS & ACCELERATORS

There’s been an explosion of accelerators and incubators designed to nurture fledgling startups and, in the case of accelerators, turbocharge their development. The programs vary, but they typically involve some combination of training, mentoring, office space and funding. (read more)

LIONS & LOCAL INVESTING GROUPS 

A growing number of people are forming investment groups to invest in local businesses—think angel investors or microlenders with a hyper-local focus. The groups tend fall into two types: Investment Clubs and LIONs (short for Local Investment Opportunities Network). They can be a great source of compatible funding for local businesses and entrepreneurs. (read more)

NO-INTEREST LOANS

You read that right, loans with zero interest! One of the more interesting new financial developments has been the introduction of crowdfunded, no-interest loans. Kiva, the microlending pioneer, has a pilot program called Kiva Zip (as in zipcode) that offers direct, no-interest loans to U.S. entrepreneurs. Community Sourced Capital, a social purpose corporation based in Seattle, offers similar crowdfunded, no-interest loans.  Bonus: Because no interest is charged, the loans are not subject to U.S. securities laws. (read more)

ONLINE & MARKETPLACE LENDERS

Technology is transforming the lending market in ways that can benefit small businesses—or hurt them if they are not careful. A new breed of online lenders is expanding the funding options for entrepreneurs. They offer speed, ease-of-use and convenience… in some cases you can get your loan approved in less than ten minutes. Because they are not regulated like banks, they can also make riskier loans. The downside: with some lenders, interest rates can be very high and loan terms obscure. (read more)

P2P CONSUMER LOANS

Another convenient source that small business owners can turn to for unsecured loans are peer-to-peer lending sites, such as Lending Club and Prosper. Also known as marketplace lenders, they match borrowers (individuals and entrepreneurs) with investors (individuals, hedge funds and institutional investors).  The focus is on consumer loans, but many small business owners have migrated to these sites for business borrowing. (read more)

SBA LOANS

Bank lending to small businesses is down, but it would be even lower were it not for the U.S. Small Business Administration’s loan guaranty program. The SBA does not make the loans itself, nor does it set rates. Rather, the agency guarantees a portion of the loans (up to 85%) made by lenders including banks and microfinance organizations. (read more)

SLOW MONEY

Got a food business? Care about the earth? Run fast to Slow Money, a national nonprofit that works to finance local, sustainable food and agriculture. Much of the action takes place through the 30+ local groups inspired by Slow Money that have created local funding solutions tailored to their particular communities. (read more)

SUNDAY SOUP

No, we’re not talking about hitting your grandma up for money at Sunday dinner. SOUP is a grassroots model of funding—sort of like a pitch fest and a pot luck dinner party rolled into one. The SOUP movement has spread to hundreds of cities around the world. The format varies, but basically entails a group of people showing up for a soup dinner. Each person makes a small donation of $5 or so. The money is put into a pool and awarded at the end of the evening to the local entrepreneur or artist who makes the best pitch. (read more)

VENTURE CAPITAL

Are you ready for the big leagues? Venture capital (VC) is a form of private equity, usually organized as partnerships. VC funds raise money from institutional investors, such as pension funds and endowments, that the VC firm then invests in promising startups. The focus is on early stage companies, but only those with the biggest and most disruptive market potential—think Google, Facebook and Uber.  In return, you give up a hefty chunk of the company and some control. (read more)