How to become an investor in a small business

Posted by Ilayda Taze on Jun 22, 2020 06:06: PM
Ilayda Taze

how to invest in a business

Businesses are considered the backbone of the economy as they directly impact economic development and, in this article, we will explore how does investment work.

Importance of Investment in Businesses

Businesses help create jobs, fuel economic growth, and make businesses financially independent.

Many eminent business and finance journalists including James Michael Surowiecki of The New Yorker also stressed upon the importance of investment for economic growth time and time again.


Role of Investors

Investing in businesses is also a way for investors to grow their portfolio and help other business owners. Thus, over the decades general partnerships have become more popular over sole proprietorship. (Source: Investopedia)

Before we discuss how does investing in a business work first, let us see why it is important to invest.  

Why Should You Invest?

People today are opting out of investing at higher rates as compared to other generations. According to statistics, 43% of millennials are not investing their money. (Source: Yahoo Finance). The reason being millennials find investments intimidating and overwhelming because of the misconceptions about investment opportunities, the lack of accessible information and the obvious fear of losing money.

 

Lack of investments in an economy could lead to depression. With wage stagnation, job insecurity and a growing disparity between the rich and poor; it has become more important than ever for people to start investing their money.

How to do Business Investment?

Investing in a business is mostly focused on finding a growing early stage startup that has the potential to succeed and buying equity in the company.

As the business earns profits, you get a higher rate of return of your investment. When shareholders invest in a business, they buy shares in the company and in exchange, they receive annual dividend payments based on the percentage of the total annual profits. 

Hence, if the business you invest in becomes successful over time, then the value of your investment also increases. On the contrary if a business fails, you will lose your money. Later in this article, we will explore how to minimise these risks

What are the Qualities of a Good Business Investment?

In general, the best business investments have these qualities:

  • High Return on Capital

Every investment comes with some inherent risks. This means that entrepreneurs, capital owners and businesses require a return on their investments to cover that risk. Return on investment refers to the amount of business profit you will receive in exchange for your investment. 

  • Durable Competitive Advantage

Durable competitive advantage boosts business confidence. It is a sustainable factor that gives the business an edge over its competitors and protects its earning power. 

  • Excellent Scalability 

In the economic context, scalability refers to the quality of a business to grow as its resources and demand increase. Any business with a high scalability percentage will have a better growth rate and ultimately increased profits. 

What to Invest In?

Technically speaking there are three main types of investment categories in a business environment.


  • Ownership Investments

This is the most common type of investment and refers to things like stocks, precious objects, and real estate. This is the type of investment in which the buyer will own the asset.

  • Lending Investments

Lending investment is a type of investment where the buyer (investor) purchases a debt. These include bonds, treasury inflation-protected securities (TIPs) and savings accounts.

Lending investments are generally carried out through banks, brokerage houses, and other financial institutions. 

  • Cash Investments

These investments are simple and liquid meaning that they can be easily converted back to cash if required. An example of cash investments includes money market funds. 

When we talk about how does investing in a business work it usually falls in one of the above-mentioned categories and based on the category you decide determines the stakes of your investment.

Thus, the type of investment you should choose comes down to your own personal choice.

What are the Main Risks of Investing in a Business and How to Mitigate them?

One of the biggest risks involved in business investment is failure. What if the business simply collapses? If you have made ownership investments in business, then this the biggest risk you face.


Even if the business survives and ticks along without ever succeeding, you are still not getting any ROI. The key is to invest in a business that will mitigate the risk of failure and focus its objectives on growth and stability.

To achieve strong returns, direct your investments towards small startups with a high growth rate.

Instead of investing all your money in a large amount, invest in many small businesses that can mature and compete in the market. In simple words, do not put all your eggs in one basket and invest in multiple avenues.

This will allow you to build a diversified portfolio and make your investments more lucrative. If you want to know how to become an investor in a small business, then one of the best ways of doing so is angel investment.

What Is Angel Investment?

Angel investment allows you to provide capital for a business startup in exchange for ownership equity or convertible debt. It is to support new business ventures at their initial stage when most investors are not prepared to back them. 

With angel investment, you give back to the community around you, grow your money and create a flexible investment strategy. Over the last few years angel investor has gained a lot of popularity, especially in the UK. (Source: Forbes)

How to Begin Investing? 

One is never too young or too old to start investing. In fact, the sooner you invest your money the better. But how do you find the right startup for your investment? The answer is Trendscout

Trendscout is a reliable UK-based platform that connects aspiring entrepreneurs with angel investors. With more than 30 collective years of experience in investment, risk strategy and market research Trendscout specializes in identifying successful business opportunities by connecting the right investor with the right founder.

By now you are probably understood that investing in a business is a smart move, and maybe thinking that I want to invest in a small business. TrendScout can help you in this regard.

You now know the basics of how to get started and you can invest your money through Trendscout and yield worthwhile returns in the long run. 

FAQs

 

  • How do I become a business investor?

To become a business investor, educate yourself on different types of investments and find the right opportunities with the potential for growth.

  • How does investing in someone's business work?

Investors get a percentage of the ownership in the business they are investing in exchange for providing capital. Most angel investors want a 25% return on the money. 

  • What is a good rate of return on business investment?

Typically, a good rate of return on a business investment should lie between 5 to 12% per annum. Anything higher than 12% is considered highly lucrative.

  • Do investors get their money back?

There are many options for repaying investors. Either they can be repaid on a stage schedule (for debt investments) or they can be repaid based on the percentage of ownership (for equity investment). 

  • What does an investor want in return?

Investors expect to get a higher return on their money within 5 to 7 years of the initial investment. Typically, the annual internal rate of return is expected to be 20% to 40%. 

References

 

https://www.entrepreneur.com/article/341491

https://www.forbes.com/sites/forbesbusinesscouncil/2019/10/31/why-a-business-opportunity-might-be-a-wise-investment/#4a7da8314ea0

https://www.entrepreneur.com/article/236275

https://www.ignitespot.com/business-investment-and-how-should-it-be-accounted-for

https://www.seedrs.com/learn/guides/investing-in-businesses

https://www.british-business-bank.co.uk/finance-hub/uk-angel-investment-is-growing/

https://www.azquotes.com/

https://www.getsmarteraboutmoney.ca/

https://i.ytimg.com

http://blog.advisor.lk/