Investments in Small Businesses

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Investing in small businesses has long been considered a noble strategy among its proponents. For some small businesses today, nobility has taken a backseat to necessity.

As we adjust to a life of shelter-in-place amid the COVID-19 pandemic, many growing companies that rely on selling non-essential goods, providing non-essential services, or anything else that may involve risky contact with the public have suffered critical financial setbacks as their customer bases have all but disappeared.

Weakening bottom lines and layoffs have seemingly run as rampant as the coronavirus itself.

What can investors do to help struggling businesses and their employees?

You can offer support by ordering take-out from your local family-owned restaurant, something New Direction has been encouraging employees to do, reimbursing them up to $120 on takeout orders. However, there are other ways to invest in small businesses. Self-directed IRAs, 401(k)s, and Health Savings Accounts hold considerable capital that can be directly invested to give companies a fighting chance.

Private Lending

At New Direction Trust Company, your self-directed plan can “be the bank” by lending money to businesses or individuals. As the account holder, you have the power to make final decisions on loan durations, interest rates, and whether to secure the notes with collateral (your account is technically the “lender”).

Issuing a private loan to a small business could satisfy an especially prevalent demand these days. Bruce Roberts, CEO of Carofin, an investment bank specializing in private company finance, claims that “individuals and other private investors need to come together to support local businesses.”

According to Bruce Roberts, “There were over 25,000 commercial banks in the 1930s; there are now well under 4500 – fewer decision-makers in fewer places.” It would seem there’s less supply to meet rising demand than there was even during the Great Depression. Your self-directed IRA can help fill this supply gap.

Bruce Roberts continues, “30 years ago, the individual local banker still drove the bank’s internal underwriting decisions. These local bankers had individual underwriting authority up to certain limits which were dependent on their lending (and work-out) experience. Now, most banks consolidate underwriting decisions to one location, usually many miles away from the borrower, largely determined by a financial formula.”

This point is particularly relevant because you, the self-directed investor, can satisfy the role of subjective decision-maker that borrowers of yesteryear enjoyed.

Private Equity

Your self-directed account can also purchase a private equity stake in a business that needs money. You can allocate your tax-advantaged funds toward private stock, a subscription agreement, or any other business relationship in which your account secures equity in the company and the company receives much-needed cash.

Roberts observes, “The Small Business Administration isn’t known for either its agility or aggressiveness, so I’m doubtful that it can provide enough financial relief fast enough or in the right form (Convertible Notes might make sense…).”

A “convertible” note somewhat combines the elements of private lending and private equity. With a convertible note (which your NDTCO account can certainly hold), you lend money to the borrowing company. However, instead of collecting repayment in the form of principal and interest, you would collect repayment in the form of equity shares in the company. In other words, the debt “converts” to equity for the investor.

Contact New Direction Trust Company

Through good times and bad, we’re here to help you explore the broad spectrum of investment possibilities available through self-direction. Please don’t hesitate to give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com to request more information.