Why Investing in Local Small Businesses is Important in Times of Crisis

The world is a scary place, with still-uncontained pandemics, violent global crises, and impending environmental issues all flashing across our newsfeeds and becoming an everyday topic of conversation. But how do these issues play into your financial portfolio?

While you might know of some holdings you have in global businesses, have you considered the risk involved in them, considering the different levels of crisis ongoing in the world? How do you think these risks might manifest if you were to diversify your portfolio with investments in some small, local businesses?

Disclaimer: This is not investment advice and should be used for educational purposes only. Investing is inherently risky and investors should be prepared to lose some or all of their investment.

Why you should invest in local businesses when the world is such a mess

Investing local supports your local economy

When you invest in a local business, you’re investing in one of your neighbors, whose face you can usually see across the counter or helping out a customer. Your investment helps small business owners grow their business so they can send their kids to college, sponsor local sports teams, and provide a needed community space. Since 2018, Honeycomb has helped support over 541 jobs in the businesses that have crowdfunded loans through the platform.

Investing local gives you something tangible to invest in

Investing in local businesses often means that you’re investing in a major growth project the business is putting on. Whether it’s opening up a food truck, building out a new retail space, or rolling out a new line of products to go on your grocery shelves, you can physically see the impact your investment is making.

If you invest in a business in a distant country, or even a big domestic corporation, you never get to see the fruits of your investment. With a small business, all you have to do is walk down the street.

Investing local allows you to make an impact

If you’ve been wanting to add impact investing (or ethical investing, sustainable investing, however you want to call it) to your financial portfolio, investing in small local businesses is a great way to do that. You can find businesses that are owned by a variety of affinity groups, from Black-owned businesses to veteran-owned businesses. In a world where so often these groups are blocked out of opportunities of traditional financing, you can be the change that helps them grow. If environmentalism is your concern, you can find sustainable small businesses to invest in and see your investment grow.

Two different kinds of risk

When looking at the risk levels of a small business investment, there are two different types of risk you need to consider - systematic and nonsystematic. Within these are smaller categories of risk that often vary by business and by industry.

For small local businesses, some of these risks will be more prescient than others, and some less. Here’s a breakdown of the common risks that businesses face and that you as an investor should be aware of.

Systematic Risks

Systematic risks are risks that are pretty much beyond the control of a small business (or any business for that matter). They are forces that are baked into the culture, political landscape, and economy of a country or a period of time. These are usually the risks involved in investing in large, global companies.

Systematic risks include interest rate risks, currency risks, inflation risk, liquidity risk, and political risk. Right now, conflicts in Ukraine are affecting many of these risks, so those who might have global investments locked up in Ukraine or Russia may be dealing with losses. In the coronavirus pandemic, we saw many of these risks unfold for small businesses, such as inflation and increased government regulation on businesses that caused some challenges.

However, certain kinds of investments in small business can actually help businesses overcome these risks. For example, with inflation, if you invest in a small business through a loan with a fixed-income interest rate (which you can do through Honeycomb Credit), you and the business both know exactly how much is being lent and being paid back.

Small business investments have also been shown to help businesses overcome the impacts of the coronavirus pandemic and pivot. Business owners like Melissa Hirsch and Justin Strong were able to use their Honeycomb campaigns for their respective business’s pivots through the pandemic by hiring back employees and introducing new business operations.

Nonsystematic Risks

These are the risks that are usually internal to a company - poor business practices, bad credit and lending practices, which can affect investors. While there’s always risk involved with any investment, there is something to be said about the transparency of small businesses versus their much larger counterparts.

If you invest in a local business, you can see for yourself often how a business is run, and most business owners will be happy to talk to you about the business if they’re looking for investment capital.

How can you make an impact with your investment?

Investing in local businesses wasn’t legal until only a few years ago, with the passing of Title III of the JOBS Act. Now, anyone - not just the wealthy - can invest in small businesses through platforms like Honeycomb Credit.

Honeycomb Credit is a loan crowdfunding platform, which means you can invest as little as $100 in a small business and receive your investment back, plus interest. The small businesses you invest in use your investment to grow their business, create jobs in their communities, and achieve their entrepreneurial dreams - so you get to feel good about it and make some passive income in the process!

You can find small businesses of all kinds on the Honeycomb Credit platform - from restaurants to manure companies to soap makers - all run by a diverse group of entrepreneurs. Whether you’re looking to support Black-owned businesses or businesses with a sustainable bent, you can tailor your investment decisions to reflect your values.

When the world feels out of control, empower your community by investing in it

Risk is everywhere when you’re an investor, but when you invest locally, you can channel that risk into businesses that have a positive impact on your neighborhood. Check out live campaigns funding on Honeycomb Credit today to get started making an impact!