If you’re looking for investment opportunities, start your search in your immediate network of friends, family, business contacts, and the local community. — Getty Images/Antonio_Diaz
Most small businesses need investment at some point in their lifespans. Some businesses may require an investment to start initial operations while others may need funds to grow or to weather unforeseen circumstances. If you’re looking to invest in a business, here are some general investment tips and how to navigate your first small business investment.
Types of investments
There are two common types of investments in existing businesses:
- Equity investment: An equity investment involves an investor buying a portion of a business.
By owning a share in the business, the investor is entitled to a
portion of the entity’s earnings and dividends. An investor is rewarded
based on how well the business does over time.
- Debt investment: Debt financing
involves an investor lending capital to a business. The business owner
will typically repay the loan amount with interest over the agreed-upon
loan term. This type of investment requires a repayment obligation that
is not tied to a business’s revenue. Debt financing can be risky for
small or new businesses.
[Read more: Private Equity vs. Venture Capital: What’s the Difference?]
Tips for investing in a business
Investing in a business can be a rewarding enterprise but it requires a certain amount of knowledge and forethought. Here are some general tips on investing.
Search for deals
The best sources of investment opportunities are in your established network — friends, family, and business contacts. Consider searching for startups, local businesses, and entrepreneurs on social media to broaden your network.
Not every business is searching for investors, however. Some businesses are overextended or not willing to relinquish portions of the business in exchange for capital. Don’t burn network connections while searching for the perfect investment opportunity, and be wary of too-good-to-be-true investment opportunities.
It might be tempting to sit back and watch the investment returns roll
into your bank account, but you should stay involved throughout the
Conduct due diligence
After you’ve conducted a thorough search and have found the perfect investment opportunity, conduct due diligence so you get a better feel for the company and its operations. Meet with the company’s leadership team so you can learn about the company’s goals and how its leaders plan to use the investment. This will …….