Everybody nowadays wants to make an
investment, people hope it’s a sure-fire way towards easy money and success. However, what they lack the most in this situation is humbleness. Namely, everybody wants to invest a little and make hundreds of thousands of dollars. The problem here is that this kind of get rich quick schemes never works. Here is where investing in a new business comes in.
Namely, investing in a new business may just be the safest way to invest your money. This is because you can gain the most insight into the working of said small business (especially if it’s local). Furthermore, it can give you something more than money. You will have a clear and direct picture of where your money is going. Investing in a new business also means you invest in people getting work and improving their lives. So, here is what you need to do to get the most bang out of your buck.
Do your homework
First of all, do your homework, thoroughly. See who the people that want you to invest in their company are. What is their educational background? Do they have any experience with running a business before? If so, how did that turn out? Seeing whether these people are trustworthy and competent can mean more than any other piece of information you can get. This is a benefit of investing in a new business that you won't get anywhere else (at least, not as easily).
Do these people have a clear plan and vision? What about the actual type of business – is it profitable in the area you are in? Is its competition stiff, or lax? And if so, figure out why. Checking out the credit of these people, get some comprehensive credit reporting on the way.
Next – do they seem capable? If they had any failure before, try to figure out why they failed. It could have been bad luck, inexperience, or it could have been neglect and incompetence.
Is this the right company for you?
In the previous point, we listed out many questions, and figuring out if this is actually the right company for you can make it easier for you to answer them. So, first, think about the actual work the company is involved with – do you have any experience in this field? Now, you don’t have to be directly connected to their area of work, but having some ties really helps. In this way, you can figure out whether they are trustworthy or not, and whether they know what they are doing.
Networking comes in handy if you have some experience in their field of business. You may stumble upon people who know the group whose company you want to invest in. At the very least, you can get some advice.
Another thing to think about, especially if you have no experience with this type of business, is whether you are interested in this field or not. If this is a company that you don’t believe in, no matter how trustworthy or competent they seem, you should go with your gut and not invest. Furthermore, be aware that you will not have motivation or willpower to pull through on some more difficult aspects of investing in this business if you simply don’t believe in the work they do. This may be on certain moral grounds, or maybe you just believe that the industry they are involved with will not last much longer.
How involved do you want to be
There are essentially three ways you can invest in a new business. Hiring a broker or an accountant can give you access to some excellent advice, and can give you a bit more in-depth information. But, essentially, you can go with the equity investment route, try out debt investment, or a hybrid.
When you do an equity investment, you are essentially a part owner. This means you get a piece of that pie they are working on. You provide the capital, they provide a percentage of the profits. Most of the time the return you get is proportional to how much you have invested in the company. And if you provide some guidance and expertise, you can get a slightly larger piece.
On the other hand, you have a debt investment. Here, you loan money to the new company, and they will repay the principal debt, as well as some interest. There are essentially direct loans, but can also be done via bonds and stocks. You may even get regular payments on the interest that’s latched onto the debt until the actual debt is repaid. There is much room to maneuver in this situation. Also, if the company, unfortunately, goes bust, you can get your money back through assets.
The third option is doing this through a combination of both. You can loan some money, while also investing directly and getting a smaller piece of the ownership of the company. This may seem more palatable to the company itself. Of course, some may prefer a direct debt to pay off, others don’t mind having a share of the company's ownership going towards a third party (i.e. you). You yourself should see which one you prefer. Debt investments can be more beneficial if you want a steady stream of money. Larger equity investments are excellent if you truly have a lot of faith in the company. A smaller equity investment, on the other hand, is your safest bet but also has the smallest return.
Investing in a new business can be a lucrative venture. Still, you first need to figure whether you can trust these people and whether you think the company can actually succeed or not. Furthermore, is the field they are in profitable and all – will it grow, or is it about to collapse? Finally, figure out whether you want to make an equity investment, a debt investment, or a hybrid. Hire people to give you some advice if you need to, and be careful with your money.