There is a huge psychological feel good factor from investing locally in small businesses and organizations. I agree that it’s a really good for San Diegans to invest locally but you should know the financial risks involved. The two major ones to be aware of are:
1. If you’re lending money locally it’s not an investment – you are a creditor and you should try to get protections for yourself e.g. leverage and interest covenants. And you should make sure you are secured so that in the event of bankruptcy you become the equity holder.
2. If you are making an equity investment you should understand organization’s growth potential and know how leveraged the company is. If a company has a lot of debt your stock/equity could be worthless if the business plan doesn’t go as well as expected.
Read more here:
Investing Locally from the Wall Street Journal