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How to Start Investing in a Business and Succeed
If you plan to make a profit, you need to look for promising business opportunities. There are many investment options if you are looking for one, and buying into a business is one of the best opportunities to either be a passive or active investor. You don't even have to have a massive expendable wealth to start diversifying your investment portfolio into small businesses.
Investing in a small business is both rewarding and profitable if you make the right financial choice. There may be unique challenges and risks involved, like any other investment, but there are equally as many shots to win and win big.
If you’re looking into business investing, here's everything you need to know to start looking and choosing the best investment options and succeed in the long run.
How Does Investing in a Business Work?
Businesses take a lot of money to build, grow, and succeed. It's why most, if not all, business owners seek financing. They may take business loans from banks or get funds from business investors.
Investing in a business, especially the small ones and startups, gives them a chance to grow and hopefully achieve longevity. Essentially, investing in a business means you’re putting funds in a company or venture that you deem profitable. However, before putting your money on any money-making opportunity, it’s essential to understand how it works.
You can categorize business investing in two variations or investment foundations.
- Debt investment is offering loans to a small business with a promise of repayment of the principal along with an interest income. The return type for a debt investment is a fixed income interest. This kind of investment has a lower risk, but that also means you can’t expect massive gains from it.
- The primary advantage of debt investment is you have more guarantee of getting your money back in worse-case scenarios. For instance, you, as a debt investor, have privilege in the company's capitalization structure. It means that paying the debt owed from you is a priority if the business goes bust.
- Equity investment is an opportunity to provide capital to businesses and, essentially, own a part of the business. Having a piece of the pie has massive potential returns if the business booms. However, the biggest gains come hand in hand with higher business risks compared to debt investment.
- You make money from an equity investment through paid dividends.
Each business investment type listed above has its advantages and drawbacks. Ultimately, you need to choose the type based on the comfortable kind of business risk you are willing to take.
Business Risks Faced by an Investor When Investing in a Company
Making investments always include risks, whether you are trading stocks and bonds or offering capital investments to businesses.
Two of the most common business risks that you’ll face as an investor include:
- Systematic risks or market risks are hazards involved in the entirety of the investment market and the economy. It's the volatility within the entire market scope, not only based on a specific stock or industry.
- This type of risk is unpredictable and not something that you can completely avoid. Among the common examples are inflation risk, currency risk, liquidity risk, and political risk. For instance, heavy taxation rates and increased regulations are not something that you can prevent from happening but can ultimately affect your investments.
- Non-systematic risks pertain to the dangers unique to a specific stock, company, or industry. While systemic risks affect the entire market or economy, non-systematic risks only affect certain investments.
- Two of the most common examples of non-systematic risks are company risk and credit risk. Company risk occurs when the management team makes bad business decisions or struggles to maintain cash flow, or fails production. Meanwhile, credit risk happens when the business fails to repay its investors and bond interests.
Questions to Ask When Investing in a Business
Not every business will thrive and grow and make you more money. Many businesses have ended and failed, leaving investors a pocket full of nothing. Investing in a business that you think will boom is exciting, but it's essential to do your due diligence before making any investment.
Here are some queries that could help you identify if a business is a worthy investment venture before diving right in.
What is the company strategy, and how does it make its money?
- As an investor, you essentially want to multiply your investment. No investor wants to provide funding to a business doomed to fail. It's why the first things you need to understand before investing in a business are how it operates and how it can make you money.
- However, beware of all promises and direct pitches of doubling or tripling your returns and how much the company will make in the future. There should be a detailed business strategy in place that you can understand.
How big is the market? Is the business competitive enough for the market?
- It's not enough to research the company. You have to do some digging in the market, too, to find out if the business can thrive and grow. Find out if how big the market is and if a business can compete with existing businesses. Check if the company you're investing in has a chance to grow and how they plan to do it.
Who are the people behind the business?
- A successful business mostly relies on the people running it, so it's also important to know who is behind the company. Understand the people, from the founders to the management team and even the board.
Key Objectives When Investing in Surplus Cash
There are a few factors that you need to keep in mind before investing in surplus cash.
Risk and Return
- The reason you're investing in the first place is to get a return, but investing always comes with risks. Risks and returns come hand in hand, and the more risk you take, the higher the potential return will be. However, you must be comfortable with the investment risks you're making.
- Don't forget to factor in how convenient it is to access your investments. Ultimately, you want to convert your investment into cash, and it shouldn't be a hassle to do so. Also, be aware of charges and certain fees you need to pay for when you exit your investments.
Strategies to Follow When Investing In a Business
Like any venture, investing in a business comes with risk, but there’s no reason why you can’t minimize them. These basic rules can help you invest in a business with a higher chance of profit than failure.
- Research the business, company, and market before getting sold on an investment.
- Always require and study the business plan to determine if it's feasible. Even the most promising business fails if there is no strategy in place.
- Calculate the downside risks and only take investment risks that you are comfortable with.
- Plan how you get your investment out, plus your profits.
Even if you can afford to fail and lose the money, it's critical to start investing responsibly and avoid taking reckless investment decisions.