Investing in small business can be a great way to boost a portfolio with high potential returns, while supporting local businesses and causes that are meaningful to an investor. But, investing in small business also carries risks, and it’s important to understand how these investments work before making one.
Generally, you can invest in a small business through buying company shares or lending money. Both types of investments can earn you money through appreciation or interest payments, respectively. If you buy shares, your investment will appreciate over time as the company grows and expands. On the other hand, you can earn money from loans by receiving interest payments in the form of dividends.
There are a variety of ways to invest in a small business, from crowdfunding to angel investing. However, many of these options require that an investor be an accredited investor, meaning they have the income and net worth to weather the loss of a large portion of their investments. In the last few years, as federal regulations have relaxed, crowdfunding has become a popular method of investing in small businesses, with sites such as WEfunder and Mainvest offering opportunities for anyone to invest in startups.
The most common way to invest in a small business is by purchasing equity, or partial ownership of the company in exchange for capital. This allows investors to share in the profits and losses of the company, as well as participate in decision-making processes. You can learn more on this through bizop.org.
Other forms of equity include convertible debt securities that can be changed into shares, and equity investments that pay dividends. If you’re thinking of investing in a small business, be sure to carefully research the company and speak with its principals. You want to make sure you’re working with people who are passionate about their business and have a plan for how they’ll grow.
Personal investments from friends and family can be a helpful source of funding for a small business, but they come with their own risks. For one thing, if the business is unsuccessful, you might not get your money back, and it can strain close relationships. Additionally, personal investments are often illiquid, meaning that you may not be able to sell your shares quickly if needed. That’s why it’s a good idea to limit how much of your overall portfolio you devote to small business investments and to diversify with other investments, such as stocks or index funds.