Should You Invest in a Small Business?
When you think of investing, you might imagine yourself buying stocks and reading market trends. While this is still true of investing in a small business, there are some nuances you should understand first before diving in.
Investing in a small business particularly the ones in small community is not for everyone. In fact, it’s a riskier proposition than buying stocks or mutual funds.
However, if you have a sizeable amount of money that you can put at risk without worrying about an emergency fund or other savings to back you up, then investing in a small business might be the right move for you. Here are some practical tips on how to invest in a small business:
Know What You’re Investing In
Investing in a small business is different from purchasing stocks or bonds in that you’re not just buying stock or a piece of paper—you’re actually buying a portion of a real, live business.
When you invest in a small business, you’re buying equity: you’re purchasing shares of ownership in that company. You’re not just putting money into the company but also putting yourself on the line: when the company succeeds, you succeed, because you profit from the company’s growth.
Decide on a Strategy
If you decide to invest in a small business, there are a few different options to consider. Investing in a small business directly through an equity investment is a hands-on strategy. You’ll have a say in the company and may need to work directly with the company to ensure its success.
This can be a tempting strategy if you’re passionate about the company. However, you should be aware that you may be on the hook for taxes on the profits, even if you don’t realize any income from the investment.
Deciding to purchase a business franchise is another hands-on way to invest in a small business. This can be an easier way to start your own business, using someone else’s proven product and methods to start with less risk than creating your own product or service from scratch.
Another approach you can do is to invest in a small business through a business fund or exchange-traded fund. These are investment vehicles that pool money together from many investors and then invest it in many different small businesses across many industries. You don’t have to know anything about any of the companies in which you invest, but you can still hope to profit from growth in their net worth.