3 Ways to Invest in Small Businesses
Early-stage businesses give you an investment opportunity to grow your wealth. Many big companies today began as small business ventures. Can you imagine the kind of returns early investors would have gotten from a firm like Google or Facebook?
That’s exactly what investing in a small business venture can do for you. If it becomes successful, you stand a chance of getting higher returns than investing in publicly traded companies. Mentoring, growing, and nurturing small businesses is a good means to build long-term strategic resources.
If you are looking to invest in a small business, you either opt to lend capital to the business or buy part of the company. In turn, you get a return in the form of interest, dividends, or appreciation. Let’s explain further.
Investing options for you
Debt financing
In this instance, when you provide capital in the form of a loan, it is paid back with interest. In other words, you are lending to the business by providing capital in the form of a loan that would be paid back with interest.
The business enterprise is securing funding from you as the investor. This type of investment does not give you access to the profit that the company makes over time.
The risk here is lower because whether the business makes a profit, or not it gets to pay back your loan. You do not bear the risk that comes with the company making a loss or folding up.
Other forms of debt instruments have to do with bonds and mortgage investment. When you invest in this way, you get repayment of interest on your investment. If a company liquidates, you are the first to get a payout. In this sense, debt financing is less volatile, and its value is almost constant.
Equity financing
An investor that opts for the equity method receives an ownership stake in the company. You own a part of the company and get a share of the revenue that the business generates.
You can invest in the equity of a company by acquiring the stock. When you purchase an equity stake, you are eligible for the profit that the company generates. The stock exchange market is where you need to go to buy or sell stocks.
Alternatively, look for small business ventures seeking investors. When the stock rises for these small businesses, investors make profits. Because small businesses are looking to expand and have the potential to, it’s a fertile place to stake your funds. However, when there is a fall in stock prices, investors lose money too.
Investment-based crowdfunding
Some businesses raise money through crowdfunding. Business owners pitch for it by posting details of their project ideas on a crowdfunding website. You invest in a business and receive a stake in return. For loan-based crowdfunding, you lend money in return for a set interest rate.
How it works
- Visit a crowdfunding site
2. Register
3. Get details and pitches of businesses that need funding. find out the following:
How much they need to raise.
What they plan to do with the funds.
When the request will close.
How many people have invested.
What you get in return.
Disadvantages
Business or crowdfunding sites may go south. Share may not rise, and the business may fail, which may result in an investment loss.
It is hard, even impossible, to sell the shares because they are usually unlisted.
What to do before investing
Do your due diligence
It’s important that before investing, research and ask the right questions. review the company’s business model.
Do you understand and agree with how it is being run? Find out about the person at the helm of affairs. What is his track record? is he experienced to make the right decisions for the company?
Also, find out the authenticity of the project idea. Some investors have fallen prey to hoax stories.
Invest only money you can lose.
Weigh your risk tolerance. How much can you avoid losing? Investing is a risky game, no doubt. so, how much can you invest without losing sleep? Avoid investments that unsettles you if you are risk-averse .
Investing in small businesses is a sound investment strategy. You reap the rewards of the company’s success without being fully involved in the run-arounds of managing a business.
