Barriers to Rural Investment

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Investment is a critical part of any healthy, growing economy, but the geography of investment can be uneven. Rural areas can face a particularly acute mismatch between the various actors supplying community development investment (supply-side barriers) and communities seeking investment dollars (demand-side barriers).

The world of community-focused investment and community development finance encompasses the many sources of funding that support stronger and more resilient communities, including public, private, and philanthropic resources. It includes a small business owner seeking a loan through their local bank or credit union, a local government working to redevelop a stretch of their historic downtown, or a nonprofit working to finance a new community center.

Programs that support these types of investments are part of an ongoing debate around the importance of population density in choosing investment opportunities. In a world of trade-offs measured by people or place, how do different actors make decisions about investment in places with higher or lower density? How do different actors define and evaluate their return on investment, be it financial return or community economic benefit? Does (or should) size of community and size of project influence investment choices?

Supply-side barriers to investment in rural areas include limited financial resources, a lack of coordination of public investment programs, and limited presence of funders including philanthropic foundations, community investment entities, and traditional financial institutions. Demand-side barriers include fewer projects ready for investment due to capacity limitations in rural areas, smaller investable projects that require the same amount of work as larger projects, a perceived higher risk environment, and other challenges to making projects "investment ready," such as constrained appraisals. These challenges require creative solutions, like a few highlighted toward the end of this post.

Supply-Side Barriers

When we look at the supply of credit and capital potentially available to smaller towns and rural communities, we can identify several barriers:

1. Lower levels of community financial resources

   A combination of lower population, lower household incomes, and fewer large corporations can limit both the tax base of rural communities and the public and private capital available. Of course, income and wealth dynamics vary by community, but a portion of smaller towns and rural areas experience this challenge acutely.

2. Fragmented public investment programs for rural communities and limited coordination

   According to the Reimagining Rural Policy Initiative at the Brookings Institution, federal public programs for rural economic and community development are spread across more than 400 programs, 13 departments, and 50 offices and suboffices. While these are challenges in urban areas too, rural areas face heightened fragmentation across public investment programs. At the same time, there is generally little or no supply-side coordination of public, philanthropic, or private investment - each funding source may require its own application process and reporting requirements.

3. Limited presence of philanthropic foundations, traditional financial institutions, and community development intermediaries

   On top of complications with funding sources themselves, there are fewer funders located in rural areas and limited urban- and suburban-located funders that work in rural areas. American philanthropy became increasingly urbanized through the 20th century, and although work is ongoing to update estimates of philanthropic activity in rural areas, preliminary work suggests that approximately 3 percent of all philanthropic dollars flow to rural communities. Similarly, rural communities have experienced high rates of bank branch and headquarter closures. When a community lacks funders who are part of the community and familiar with the area, it can be significantly more challenging to develop strong relationships with the critical leaders who are well positioned to invest.

Fragmentation and limited coordination mean that communities and community development organizations must assemble a "capital stack" - an often complex combination of funding sources that cover the full cost of a development project. Complex projects with large capital stacks require experienced professionals who can manage development over many years, and many professionals with these skills start out in rural communities and then move to high-capacity organizations in denser communities. The challenge of complexity is not unique to rural areas, but it can be made more challenging in rural areas by limited access to funders, and by demand-side barriers.

Demand-Side Barriers

Of course, a strong supply of investment capital means little if there are no development projects or businesses that are ready for investment. When we look at the demand side - or the ways that communities position themselves for economic and community development investment - we can similarly identify several barriers:

1. Community leaders wear many hats

   Through the Richmond Fed's engagement with rural communities, we frequently hear about the many roles that rural leaders juggle - a town councilperson may also be a high school teacher, a baseball coach, and help run a local nonprofit. These leaders are deeply committed to their communities, but there is also little time to navigate the complex realities of economic and community development. Without dedicated economic and community development staff, it can be particularly challenging for a community to navigate the resources available and to move a project from idea to execution.

2. Challenges with access, infrastructure and topography

   Small towns and rural areas can face a longer road to project development and completion because of the physical space itself. In some cases, just accessing rural communities combined with infrastructure limitations or geographic topography can add time and complexity to an already complex process.

Creating Solutions

In the face of these complexities, communities are developing solutions, often through partnerships with local government, the local nonprofit and business community, community development financial institutions (CDFIs), philanthropic funders and others. One example of this is in a Richmond Fed article on the philanthropy gap in rural America. The Claude Worthington Benedum Foundation, a regional foundation that works in West Virginia and Southwestern Pennsylvania, aims community investment strategies in multiple areas, including support for small business, investments for relending through rural CDFIs, downtown revitalization, and ongoing funding for the West Virginia Community Development Hub. This funding helps the West Virginia Community Development Hub provide capacity building, so that West Virginia communities can plan and execute community initiatives. Another recent example comes from the T.L.L. Temple Foundation's investment in two CDFIs, Communities Unlimited and PeopleFund, to establish a physical presence in rural East Texas. The physical presence of these funders has resulted in $1.8 million deployed through 13 East Texas counties since 2022, as well as small business counseling services and local job retention.

The Richmond Fed's Rural Investment Collaborative also works to address both supply- and demand-side barriers. On the supply side, the collaborative convenes a Capital Development Workgroup that is committed to researching and elevating supply-side barriers in rural areas. On the demand side, Fifth District communities can apply to participate in the Community Investment Training program, a course that equips rural leaders with the knowledge, skills, and confidence to produce a viable community or economic development proposal.

Conclusion

There are reasons to be intentional about investing in places, especially rural, where community is strong, buildings are available for reuse, and sense of place is authentic. The supply- and demand-side barriers in rural communities are real, but not insurmountable. Funders, investors, communities, and other partners are working together to take on more projects in rural communities. The resourcefulness of rural cultures makes them ready to overcome challenges, while changes to work-life, enabled by technology, are making rural places more accessible for people of all backgrounds. Creative solutions to investing in projects in rural communities are within reach.

Jen Giovannitti is the president of the Claude Worthington Benedum Foundation and a member of the Richmond Fed's Rural Investment Collaborative Capital Development Workgroup.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.