If You Can’t Get Money From VCs Or Connections, Try Locavesting

local business

[credit provider=”Office of Governor Patrick”]

This article originally appeared in American Express OpenForumSmall business owners are still having a tough time raising money these days. Bank loans are hard to come by. Venture capital is limited. And it’s not easy to ask friends and family who are struggling financially for support.

Luckily, there’s an alternative, in the form of “locavesting” — a new movement aimed at supporting and investing in small businesses.

“We’re seeing more companies veering away from conventional ways to find money and, instead, tapping their biggest supporters: their customers and their community,” says Amy Cortese, a Brooklyn, NY-based small business expert, who coined the term and is author of Locavesting: The Revolution in Local Investing and How to Profit from It.

To find locavestors, Cortese suggests taking these steps:

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title=”Approach your customers”
content=”If you’re running your business well, chances are your most avid supporters are the people buying your product or service. For that reason, a good place to start is with your own customers. In some cases, that can even work before you open your doors.

Cortese points to Brooklyn-based Greenlight Bookstore, which had trouble raising enough money to get started during the recession. But the owners, realising how enthusiastic the neighbourhood was to have a new independent bookstore in the area, decided to approach local residents about giving them a loan. They raised $70,000 from about two dozen neighbours and opened for business in October 2009.

Should you go that route, remember to stay within Securities and Exchange Commission (SEC) rules, according to Cortese. If you have a pre-existing relationship with an individual, you can raise money directly from them without having to fall under the SEC’s regulatory jurisdiction.

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title=”Check out local investing clubs”
content=”You know all those Beardstown Ladies-style stock market investment clubs? According to Cortese, there are now a handful of clubs in places like Port Townsend, Wash., and Madison, Wis., through which members make loans or equity investments in local businesses.

In some cases, people invest individually, in others, they pool their money together. Generally, members already know the business owners making a pitch, so they meet SEC rules.

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content=”Sure, you can use such sites as Kickstarter. You could also try Profounder, which lets entrepreneurs reach out to their own social circles. You simply upload a pitch and create a term sheet. Then you get a web page where you can invite anyone you want to invest directly in your company.

Ultimately, investors don’t make loans or take an equity stake. Instead, they get a percentage of revenues.

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title=”Check out the Slow Money Alliance”
content=”Slow Money Alliance was created by Woody Tasch, the founder of Investors Circle, an angel group for social enterprises. The alliance makes small investments in local food-related companies.

The alliance hosts an annual national conference — the next one will be held in October in San Francisco — where entrepreneurs can showcase their businesses.

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content=”It’s easy to do if you confine yourself just to your state. Then, you can raise money from your members. Cortese points to Black Star Co-op Pub & Brewery, a microbrewery in Austin, Tex., that raised $600,000 from more than 2,000 members last year, offering them a 6% annual dividend.

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title=”Look into direct public offerings or local stock exchanges”
content=”If you have a strong following and higher capital needs, there’s also the possibility of a direct public offering. “That’s like an IPO, but without a high-priced investment banker between you and your customers,” says Cortese.

Companies like Ben & Jerry’s and Annie’s raised funds this way. If you limit the offering to the state you operate in, you’ll also cut out a lot of SEC red tape.

In addition, a handful of communities are developing locally-based stock exchanges, focusing on companies in their area. “They’re carving out a safe space where people can make long-term, local investments,” says Cortese.

Perhaps the furthest along is an exchange in Maui, Hawaii, where the state legislature is considering ways to introduce such an enterprise, says Cortese. Lancaster, Pa., and Toronto also are developing their own exchanges. “Global stock exchanges are efficient, but they don’t serve the needs of a great many companies,” says Cortese.

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title=”See more”
content=”Check Out 7 Ways To Promote Your Business Online For Free >
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