How to invest locally: best community investing options

If you've got money to put to work, you may want to consider circulating it in your local community or toward values that you care about. To invest locally involves financially helping your immediate neighborhood or a community you care about while also seeking to earn a return.

Even if you don't have a particular cause in mind, you can still find plenty of local investment opportunities to bring tangible improvements to the circumstances of a group, organization, business or individual — while reaping benefits for yourself too.

The short version

• Local investing is an avenue of investing that directly brings funding to community programs, nonprofit organizations, small businesses and support groups while generating a return for the investor.
• When investors put money into a local business or group, they help boost the local economy. And this creates more jobs, keeps individuals in the community and helps the government generate more taxes to go into local infrastructure.
• There are many ways to locally invest. These include joining a credit union, investing equity in a business, regulation crowdfunding and investing in social impact bonds.

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What is local investing?

Local investing involves lending money to help a community organization or business accomplish a goal, with the expectation that they will pay you back with interest. You receive the interest as the return on your investment.

Many people lump local investing in with socially responsible investing (SRI). This makes sense as both aim to earn returns for investors while supporting causes that contribute to the social good.

However, an SRI strategy often means excluding companies that don't align with an investor's values. Local investing, meanwhile, is all about purposely including community projects that an investor believes in and wants to support.

More: What's the difference between ethical and sustainable investing?

Why should you consider local investing?

Investing locally isn't just about doing good. It has tangible benefits and should be a consideration when allocating your investment dollars. Investing locally includes the following options.

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Helping the local economy

A key aspect of investing locally is that you, well, invest locally. It involves finding a community, organization, property or financial institution that you care about. Then you lend your dollars to help it achieve a goal. This could include providing seed money to a new business, buying property to rent to local tenants and lending money to a not-for-profit organization to hire new employees.

In each of these cases, you boost the overall local economy. And this creates jobs for those living nearby. In turn, those employees go on to purchase goods and services. And that adds even more dollars to the local economy. And the local government continues to collect income, sales and property taxes it uses to maintain and improve infrastructure.

Investing according to your values

Investing locally allows you to tailor your investments to help causes that you're interested in supporting. Whatever your interest — whether it's climate change, ethically-sourced goods, local farms or human rights — you should be able to find a local investing opportunity that complements your values. In this way, you can use your money to grow your net worth and do good.

More: How to get started with ESG investing

Supporting local business

A common local investing strategy is to invest directly in a local business, such as financing an expansion for a small business. If you're interested in investing in a local business but aren't sure where to start, find a local business development organization. These organizations exist to support local businesses and will be able to help you find businesses that could use your support.

Helping those in need

Investing locally can also directly help needy individuals and families in your community. For example, a landlord who charges less than the market rate still profits from their investment while helping lower their tenants' cost of living. Helping individuals has a ripple effect as the people can improve their living circumstances and contribute more to the local economy.

Risks of investing locally

Investing locally carries the same risk as other investments. Namely, you may not receive your principal back or earn interest. This risk exists for all investments. But investing locally presents a unique challenge for investors.

If you invest in a small business or an enterprise bond, you don't get the benefit of extensive online analysis that larger investment opportunities carry.

You can find lots of discussion on the pros and cons of various ETFs or whether Bitcoin is a good investment. However, you won't find that type of analysis for local investments. So you have to do your own research. And if you choose wrong, you could lose your potential interest and some or all of your investment.

Also, local businesses simply have fewer financial resources than large publicly-traded companies. This makes your local coffee shop more at risk of going out of business during hard times than Apple, PepsiCo, or Procter & Gamble.

Types of local investing

Investing locally is a broad term that can take many forms. Here are some common ways to invest locally.

Join a credit union

Many people see a credit union simply as an alternative to a bank. But in reality, credit unions have a mandate to work within a local community and invest your deposits into local businesses and individuals.

With a credit union, you're a member, not a customer. The savings you deposit into an account with a credit union is pooled with other members' savings. Then the credit union uses that money to fund local interests and organizations. And the credit union distributes profits to the members as dividends.

Despite the differences in how credit unions operate, many credit unions offer services and products similar to other banks. You earn interest on your deposits and take out loans and mortgages. Most credit unions also offer credit cards, including rewards cards.

Joining a credit union — just like starting a savings account with a big bank — does not require a big upfront investment. But unlike with many large banks, you don't have to worry about your money going to controversial investments like fossil fuel companies or arms manufacturers.

More: Credit unions vs. banks - what's the difference?

Invest equity in a local business

As we mentioned above, investing directly in a local business is a good way to invest locally. Small businesses often struggle to secure loans from banks or credit unions, so borrowing directly from private lenders may be a more viable option.

If you aren't prepared to invest directly in a company, you can invest in a community development fund like Reinvestments Fund. These funds pool investor capital into larger interest-generating loans.

Municipal bonds or government-sponsored enterprise bonds

Investing locally isn't restricted to investing in businesses or buying real estate. You can also invest directly in local government or the projects they champion. You do this through municipal bonds issued by states, cities or other local governments.

These act as a loan that governments pay back with interest. The local government then uses that money to pay for infrastructure or fund their operating budgets. Since government agencies back these bonds, they tend to be a safe option and are a good choice for investors with lower risk tolerance.

More: How to invest in bonds

Regulation crowdfunding

Crowdfunding has gained popularity in recent years as a financing method that involves smaller investment amounts from a big group of investors. “Regulation crowdfunding” lets companies offer to sell up to $1.07 million of their securities without having to register with the Securities and Exchange Commission (SEC).

Regulation crowdfunding was established in 2017. Since then, it has emerged as a popular way for small local businesses to sell shares or bonds to investors — sometimes in increments as small as $10. These businesses may not be able to raise capital through a bank loan.

These types of capital raising initiatives help small business owners fund their business startup or expansion plans. And that keeps owners from having to solicit donations from friends and family or wealthy investors.

Crowdfunding platforms like Mainvest and Fundable connect individual investors with business owners looking to have their proposals funded. These platforms take care of vetting the business owners that want to join their marketplace which can save investors a lot of time.

Social impact bonds

A social impact bond (SIB) allows governments to pay for programs that deliver a desired result or social outcome. Known as a form of “pay for success” financing, SIBs let investors provide upfront funding to help a government achieve a measurable goal.

It works this way:

• The government sets up a social program with an explicit goal in mind that benefits the local population. These goals include boosting job growth, alleviating homelessness, making health care more accessible to vulnerable communities and reducing prison recidivism in a city, county or state.
• The government taps an external organization to help carry out the SIB project.
• The external organization taps funding from investors through various trusts, foundations, mutual funds, Community Development Financial Institutions (CDFIs) and high-net worth individuals. And some major investment banks underwrite SIBs.
• The organization also enters into agreement with third-party service providers that help them turn their goal into reality. All shareholders lock into a contract that guarantees that if the goal is met, they receive their money back with interest.
• If the goal is reached (and this is usually determined by an independent evaluator), the government releases funds to the external organization, which then uses the money to pay back the investors.

SIBs are another relatively new financing tool. The first SIB program started in the UK in 2010 with a prisoner recidivism program. Since then, they've grown in popularity across the world and have proven to be successful in 18 states.

SIBs offer a tangential benefit to improving systems and disadvantaged populations that would otherwise not see funding. But they've attracted criticism for being available only to programs that can outline measurable goals.

Should you invest locally?

Investing locally can be a good complement to an existing portfolio and is an excellent way to give back to your community while still earning a reasonable rate of return. There's a wide variety of options for investing locally. What you choose depends on your risk tolerance and available capital.

Keep in mind that it can be more challenging to accurately assess risk when investing locally. This means that you should dedicate only a small portion of your portfolio to local investing.