Investing in a business can allow you to earn some money, and perhaps even to gain financial independence, if you do it right and if you are lucky. And if you choose to invest in a local business, you will be helping your local economy while giving back to your community.
But how does investing in a business work? It isn’t that complicated, but there are many things you need to know, and you have to do your research before you get started.
If you’ve been asking about how does investing in a business work, follow these seven steps for beginners:
Step #1: Determine your investment expectations
“How does investing in a business work?” is always the question we ask about when we want to invest in a business. Before you start looking for investment opportunities in a business, take a moment to ask yourself why you want to invest. Are you hoping for a miraculous return on your investment, or do you simply want to help a small business grow?
Keep in mind that many investors only get a small return on their investment, and that if the business you choose to invest in fails, you might loose your money. If you can’t take that risk, maybe you should choose a safer way to invest.
The key to success is to choose to invest in a business that is likely to succeed over time. If you expect to get rich quickly, you might get disappointed.
Step #2: Understand what makes a good business investment
If an investment opportunity looks risky from the start, you should probably listen to your intuition and search for a better one.
Some businesses are more likely to succeed than others. If, for example, you invest in a business that sells a product that is in high demand, and will certainly be in high demand regardless of the state of the economy, you are making a good investment.
The business you invest in should also be scalable, which means that if the demand for their product or service grows, they will be able to grow and meet this demand.
A good investment will offer you a high return on your capital, with minimal risk.
Step #3: Learn two main types of investments
There are different ways you can invest in a business, but the two main types of investments are equity investment and debt investment.
When you choose equity investment, you invest some money to become a partial owner of a business. In exchange for the money you invest, you will receive a percentage of the profits made by this business.
When you choose debt investment, you act like a bank that provides a business with a loan. The business will use your money to grow, and will commit to paying you back your money eventually, with interest. This type of investment is less risky than equity investment, but usually offers lower returns.
Step #4: Search for investment opportunities online
If you don’t know where to start, you should search for investment opportunities online. There are websites that connect investors with businesses that need funds, and business advisors who are ready to give you some advice and to recommend good opportunities.
You could also ask for the guidance of an experienced investor who could offer you some helpful tips, and perhaps even share a few business investment secrets with you.
Step #5: Learn more about the business you invest in
Even if someone with experience recommends investing in a business, you should learn more about it before deciding whether you want to invest your money or not.
What service or product is this business selling? In which industry are they operating? Where are they located? Do they have a history of financial struggles? Are they planning to expand? How many investors do they already have?
Review the business plan and the marketing plan of the business, and ask if you can see their accounting books to have a better idea of their cash flow.
Step #6: Get to know the owners of the business
You should also do some research about the owner, or owners of the business you are interested in investing in. Try to learn more about them. Is this the first business they are running? Are they used to managing employees? Have they invested some of their own money in their business, or are they only relying on investors?
If you want to invest in a local business, you could even arrange a meeting with the owners. After all, they could become your business partners, so it makes sense to get to know them.
Step #7: Understand the industry before you invest
Finally, make sure you don’t invest in an industry you don’t understand, and know nothing about. Even if it looks like a good opportunity, you will not be able to make the most of it if you have no idea what their business is about.
On the other hand, if you invest in an industry you are familiar with, it will be easier for you to make good investment decisions, and you could even provide some valuable insights to your new business partners.