A remarkable thing happened… and it all started about a year ago, when one of the audience members at the Slow Money Boston Entrepreneur Showcase, Lisa Sebesta, decided to invest in Recover Green Roofs, one of the presenting businesses. She liked their business model, and decided to approach them to loan them money directly.
Six months later, at our next showcase, I asked Lisa to share her story about the deal. At the end of her presentation, “Bob” came up to me and remarked that he didn’t realized how straightforward it was to directly invest in a business. And he approached Green City Growers about investing.
At the next showcase, “Bob” shared his story… and more people came up to me that night, inspired to start investing in local businesses.
As we talk more about local investing, we’re thinking about new investment tools, and we’re all learning as we go along. But because these instruments are not as familiar the traditional bank debt and equity investments, people may shy away from them, if they even know about the possibility.
My favorite way to visualize this breadth of options is the Capital Continuum, created by the Vermont Sustainable Jobs Fund. At either side of the spectrum is the more familiar bank debt, typically with low interest rates and also risk averse. And then there’s equity and VC: they’re typically more risk tolerant, which come with a higher interest rate. And the whole spectrum in between.
These are some of the real stories of how entrepreneurs are getting the financing they need to grow their businesses beyond “traditional” bank debt and equity. In sharing these stories, I hope that investors will better understand the breadth of opportunities to invest in our communities, and entrepreneurs will feel empowered to grow their businesses because they can find the capital they need.
- Traditional banking is at the far right of the spectrum, with the lowest tolerance for risk. And with it comes a lower return (or interest rate, if you’re looking at it from the perspective of the borrower). Towards that end, Equal Exchange is an example of a business developing creative financing, while using conventional channels. They worked with their bank to create a certificate of deposit. Instead of the bank having to insure funds themselves, investors undertook the risk: if Equal Exchange were to go under, the bank doesn’t lose anything and receives a management fee.
- For a more flexible option, MASSGrowth Community Capital does transition lending, intended to provide very new enterprises with an operating capital loan, or to work with developing businesses that are not yet ready for venture capital. They operate at a higher interest rate, closer to 9-10%. Contact Jose Luis Rojas if you’d like to discuss these types of options.
- In the middle of the spectrum, royalty financing offers a combination of debt and equity — in that you get the upside of equity, with a higher return, but the investor still doesn’t have control over the company. The investor gets a percentage of revenue, with a targeted interest rate of maybe 19%. That rate offers a high potential return, but isn’t guaranteed over the term of the loan.
- Further to the right are investment clubs, such as Sprout Lenders. These groups don’t necessarily take any collateral, and have the flexibility to take riskier loans. As such, they tend to charge higher interest rates.
- Right around the investment club is Lisa’s Peer-to-Peer Lending model. It has among the highest rates of return, if the investment works out. The advantage of peer-to-peer lending is its directness: because there’s no middleman, you can set your own terms, and you’ll get a higher potential reward. To put this in perspective, investment clubs might charge 9%, but only see 3% after administrative costs; a peer-to-peer model loses less of it though overhead, which allows them to get a higher return.
That’s a lot of options — and as you can see, this is only scratching the surface. If you’d like to discuss what type of financing might work for your business, feel free to make a 15-minute appointment on June 25th. Or get in touch by email.