Times have been hard for entrepreneurs of late. Take Rick Stender, the founder of a bike company. He wanted to borrow money to pay for bike part imports from China so that he could build a bunch of bikes in the US and then sell them on to his customers.
Unfortunately, thanks to ongoing financial repression by big commercial banks and the government, he was unable to get credit, despite having a viable business plan and a customer base.
A random investor in the local community took pity on his business and lent him the money that he needed when the banks wouldn’t. Stender bought the parts he needed, made back the money to repay and loan, and made the investor more than $4,000 in the process.
Entrepreneurs need to realize, therefore, that the people in their local neighborhood are a great resource when it comes to setting up their own businesses. Most people should forget about banks unless Trump does something to completely overturn the existing financial order.
According to Colbeck Capital Management, one of the problems that institutional investors have is that they overweight idiosyncratic risk while they underweight systemic risk or the risk of excessive leverage.
In practice, this means that banks will quickly find fault in individual business plans and use that as an excuse not to lend money, but they’ll have no problem lapping up highly-leveraged assets, like mortgage-backed securities. It makes for a totally skewed market, and it’s not fair.
Because of this unfortunate phenomenon, local communities themselves are returning to their traditional role of offering finance. Instead of putting their money in massive companies halfway around the world, many communities are recognizing the value of having successful entrepreneurs in their own areas and are adjusting their investment portfolios to match.
According to advocates of the system, everybody wins. Wealth stays in the local area, jobs are created, and investors still get a return for putting the money in.
Entrepreneurs are also benefiting from this new trend. Rick Stender’s loan wasn’t rigid, like a loan from the bank. Instead, it was flexible because he was able to constantly negotiate with the person making the loan. Entrepreneurs will frequently run into trouble, as was the case for Stender. But even when things were tight, his creditor allowed him to go without having to pay interest for a couple of months, because he wanted to see his business succeed.
According to software engineer, Sallie Calhoun, local investing is key to the success of businesses in the local area. She says that it offers greater flexibility and it makes it more likely that the loan will eventually be repaid.
You’re much less likely to walk away from the person you’re borrowing from if they’re a valued member of your local community. In turn, this has the effect of lowering interest rates overall, simply because it is less risky to lend to a person you know.