Investment in Other Businesses
Perhaps one of the biggest advantages of doing well financially is an opportunity to invest in other businesses or projects. There are three types of investment and I consider them in turn.
Gifts
This is the least engaged of the three types of investment. You give away your money and do not expect any return. At least, that is the purest form of gift. Sometimes people offer gifts with strings attached. Those who offer a gift or grant may ask you to produce outputs in return.
If you actively seek donations you are a charity (although not necessarily registered) and must spend the money for your stated purpose. A corporate donor may therefore insist on outputs because their donation may in its turn be accountable under charity law. Individual donors may be happy with an annual report or online feedback.
The Donor’s Purpose
From the point of view of the donor, giving to a corporate charity is perhaps the least engaged form of giving. You hand responsibility to a charity and trust it to spend your money to meet its objects.
A more engaged form of giving might be to give to a local charity, where you can see for yourself it is effective. You know the people who run the charity and are happy they take on daily responsibility. Your contribution helps them carry out their objectives.
Of course, there are gifts to family and friends. You give birthday gifts with complete freedom to use or spend as the recipient desires. They are the charitable object, as it were. Some gifts are given in response to an expressed need. But here it may be worth considering some other way of investing your money.
Another form of gift is money given away to strangers, most commonly for those who beg for money on the streets. This is usually with no expectation of any particular outcome other than perhaps the relief of immediate suffering.
Loans
Loans are a more engaged form of investment. These are contributions made in expectation the full amount will be repaid, possibly with interest.
The most formal approach might be a loan from a bank or similar financial institution. One very common type is the mortgage. But it also includes formal bank loans and informal loans through credit cards.
Loans, especially when offered to individuals, are the main reason there is so much debt. Interest accumulates and increases the amount owed until it becomes difficult if not impossible to maintain payments.
The problem is ultimately, especially where you are investing locally, the debtor must make a repayment. To insist on repayment to schedule is to effectively close down the enterprise you have invested in, if it is not in a position to repay. It is hard to see how there can be anything other than a negative outcome for one or both parties, where the investment has not borne fruit.
The debtor in effect depends on the good will of the creditor and this will depend on the confidence the creditor has in the enterprise. The creditor may find closing the enterprise is the only way they can recover their investment.
This is not to say loans are not a valuable form of investment. A lot depends on how their structure and local circumstances.
Equity
Of these three types of investment, equity is the one that implies the closest relationship between the donor and recipient. The donor takes a share of the profit or of the losses made by the recipient. If the enterprise comes to an end, they share the remaining assets in proportion to their original investment.
The reason this works so well is the interests of the donor coincide the recipient’s. The donor must be confident the recipient can succeed but it is also in their interest to be sure the recipient does succeed.
A family member might enter an equity arrangement with a young person, for example. They might offer their business experience as well as finance to set the young person in business. The donor will see this as an investment and not entirely for support of the young person. Any return can be reinvested in the same or other enterprises.
Some people invest in equity to generate income. Some do this through stocks and shares but it is possible to receive income from informal equity arrangements. You would simply draw on the business in the same way the owner might, you are in effect joint owners. So, if you own 50% of the business, you receive £50 for every £100 profit. That’s the principle and life is rarely as simple as that.
Conclusion
The question for those who wish to support local business is which of these types of investment are likely to be most effective in support of the local economy. It is not possible to categorically say which approach is the best because so much depends on local circumstances.
The main thing to bear in mind is if you invest, do so with money you can afford to lose. Don’t back one enterprise with everything you have.
Has this post been helpful to you? Please let me know, especially if you would like me to expand on any point.