Small Business Investing: A Kinder, Gentler Alternative to the Stock Market

Gentle readers… shit’s straight fucked.

This Bear Market (i.e., when the stock market plunges and investors start sweating bullets, not a charity auction event I’m sure is occurring somewhere this Pride Month) is scary stuff. It can be incredibly difficult to stick to a long-term investing strategy when it looks like you’re losing hundreds or even thousands day by day. Cutting your losses and pulling your money out of the stock market is a strong temptation.

For the record, we don’t recommend doing anything so hasty. But we also feel your pain! Which is why we’ve always recommended mitigating your risk by diversifying your investments. Remember our classic lesson about horcruxes and investment diversification? If not, go read it now. I’ll wait.

Welcome back! Today we’re introducing one of my favorite diversification horcruxes: small business investing—a lovely little option for the nervous stockholder looking for another way to grow their money outside of the stock market… while keeping their ethics intact.

What is small business investing?

By February 2021, the coronavirus pandemic had been ravaging the world for a full year. Not only were people dying, but small businesses were too. And while we’ve never condoned lamenting the suffering of the economy with the same heartfelt compassion and grief as we lament the suffering of, y’know, actual people… it still sucked. Small business owners were struggling to keep their doors open.

A close friend we’ll call Kali (because like the Hindu goddess, she is a master of death, time, and change, and works with the efficiency of a many-armed, all-powerful being) is an insanely talented brewer of craft beer. She’s a young, ambitious lesbian entrepreneur dedicated to her craft and her community—exactly the kind of boss bitch we believe in around here.

In early 2021, Kali owned a 25% portion of her brewery, while her business partners owned the other 75%. Given the straight fucked state of the world, her partners got cold feet. They wanted out. But Kali didn’t have the money to buy out her business partners. And small business loans from major banks were thin on the ground during a global economic crisis.

So Kali turned to her community. She asked me and a couple other friends to invest in her so she could buy out her business partners and gain full ownership of her brewery.

How does small business investing work?

Lest you think I am as guileless as I am beautiful, charming, and humble, the first thing I did was check out the brewery’s books. The second thing I did was nod sagely and pass those books to someone who actually knows what the hell they’re doing when it comes to business accounting.

Assured that the brewery was neither bleeding cash nor fronting an underground money laundering scheme, I drew up a contract with Kali outlining the terms of my investment. I literally found a template online, filled it out, signed it, and got it notarized. Then we went to the bank to transfer the money.

On a small, peer-to-peer scale, that’s all we needed to do! There are normally two ways to structure a small business investment:

Profit sharing

Most small business investors get involved to collect a share of the profits. They fork over an initial investment, and in exchange, the business turns on a faucet of shared profits into the future. This is a pretty traditional style of investing. It looks a lot like buying shares on the stock market, just on a smaller scale.

The risk, of course, is that the small business will fold, or be way less successful than predicted. Which is nothing new if you’ve ever invested in literally anything at all ever. There’s always risks.

Personal loan

My investment in Kali’s brewery is structured like a personal loan, complete with a repayment schedule and a fixed interest rate.

This means the money we get out of the arrangement is not based on how well or poorly the brewery is doing (it’s crushing it, thanks for asking), but on Kali repaying her debt to us plus interest. This made sense for us because all Kali wanted to do was buy out her business partners, not expand the business, buy new equipment, or make other expensive improvements.

It’s less risky for us because whether or not the brewery is profitable in the long term, we get our money back. And it’s less risky for the business owner because we could negotiate simple terms, including a very forgiving repayment schedule. More on that in a sec.

Why invest in a fucking brewery when no one can leave their homes?

And here we get to the crux of the matter: I invested in Kali’s brewery not because I expect to get rich off the business. I did it because I care about minority-owned businesses, centers of community, ethical business practices, high quality craft beer, and above all…

To be perfectly honest, I don’t expect to get rich off my small business investment. And I’m ok with that! That wasn’t my original goal. My goal was to keep a woman-owned local business afloat so that it could continue to serve our neighborhood as a community gathering spot and source of delicious craft brews with punny names like “Queerly Beloved” and “Gender Fluid.” (Everyone who works there is either gay or a dad.)

Getting a return on my investment in a few years would be awesome! But it wasn’t my primary motivation. I wanted to help a friend. And I wanted to try investing in something I believed in.

All investing comes with risks

If everything goes according to plan and the business succeeds, by 2030 I’ll have received a tidy profit.

Note my careful use of lanugage above: “If everything goes according to plan and all five businesses succeed.” Because all investing comes with risks, everything might not go according to plan! I could be out $1000! Or, more realistically, I could be looking at a return of $1080, significantly less than I expected, but still more than what I started with.

The difference between investing in an index fund that tracks up and down along with almost the entire stock market, and investing one by one in a handful of small businesses, is that it’s a lot easier to notice when one of those small businesses goes tits up.

Cannabis, while definitely on the road to federal legalization, is not legal in many states, which precludes them from a lot of traditional funding. And restaurants are widely known for being on the riskier side of the investment scale.

The alcohol industry, on the other hand, has a reputation for being recession-proof, which is true to varying degrees.

Make good while doing good

I’m still happy with my decision to invest in a small business. Here’s why.

When I invested in Kali’s brewery, I did it because I wanted to do something tangible to give back to my community. I wanted to share my financial good fortune with an entrepreneur I believed in. And I did it because there are vanishingly few women brewmasters in the country, let alone queer brewmasters. Representation fucking matters, you guys.

We’ve gotten a lot of questions about ethical investing recently. ESG investing (which stands for environmental, social, and corporate governance and encompasses companies actively trying not to be dicks) is a hot topic. And while we have mixed feelings about some mainstream ESG investing opportunities, we both agree that it’s certainly more ethical to invest in a transparent small business than a giant corporation with questionable labor or environmental practices.

Alternative investing

What did you guys think? Are you interested in learning more about other alternative forms of investing? Real estate investing is next on our list, but we’re open to ideas. Sound off in the comments below!