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Small Business Investing: What You Need to Know

Many people are looking for other ways to add to their income streams. With the economy still reeling and companies and businesses are working hard to regain the momentum they once had, people are looking for different opportunities to earn some extra cash.

If you have enough spare cash to go around, perhaps you should consider small business investing.

Defining Small Business Investing

What is small business investing? How does it work?

Small business investing is lending capital for a small business or buying some of its shares. By lending to the company or buying shares, you can earn through interest, appreciation, or dividends.

For instance, if you decide to invest in a few window cleaning companies in a locality, you can either buy some of their company shares or lend money to them to either help with their startup or expansion efforts. The return will depend on the type of investment you make.

Two Types of Small Business Investment

Investing in a small business is done by taking one of the two positions, debt and equity, and while both may bring good returns, there are significant differences between them.

Debt

Debt instruments allow an investor to lend a company capital which will then be paid with interest. This type of investment does not entitle an investor to a portion of the company’s profits over a certain period. Rather, the earnings will come in the form of interests added to the principal amount which is paid regularly until the full amount has been returned.

Equity

On the other hand, equity investments allow investors to have a share of the company’s profits and revenues, including its losses, over time. Simply put, it gives investors an ownership stake in a company.

How does one get involved?

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If you’re considering investing in a small business, here are some steps you need to take:

1. Look for the right business to invest in

The first thing that any investor should do is look for investment opportunities. In this case, you should be on the lookout for small businesses that are looking for additional capital and funding. Keep in mind that not all SMEs are looking for investors.

2. Talk to the leadership

Once you’ve found a potential candidate, talk to the leadership of the organization. Take this time to know what the company stands for and if it’s worth investing in. Talk to them to find out if they are people you would like to do business with and partner with.

3. Perform your due diligence

Once you’ve heard what the company’s higher-ups have to say, it’s now time to do your homework. DIg up as much information as you can on the company — its services, customer feedback, reputation, profits and losses, outstanding loans, and pretty much anything that will be useful in helping you make a wise decision.

4. Bring your negotiating skills to the table

Now that you’re done with your comprehensive and extensive review of the business, it’s time to talk business. Come up with a sample financing agreement or term sheet and present it to the company’s leadership. Go over it with them, deliberate and discuss, and, if necessary, make adjustments to the terms.

5. Seal the deal

When everyone’s happy and satisfied with the terms and agreement, seal the deal and finalize your investment and involvement in the company. Sign the agreements and give the company the amount agreed upon. Make sure everything is well-documented and that both parties have copies of all the necessary paperwork.

Which businesses should you invest in?

Based on what’s going on and on current forecasts, here are some businesses worth looking into if you’re interested in investing:

Accounting Businesses

Accounting firms are some of the best opportunities for investors since they have low overhead costs, regardless if you’re building from the ground up or are buying some of the firm’s shares.

Legal Service Businesses

Legal services will remain to be one of the most stable businesses, pandemic or not. People from different walks of life and coming from different backgrounds will need legal services and consultations.

Copywriting Businesses

Copywriters have a high-profit margin, especially since remote work has become a big thing today because of the pandemic. The operating costs are low which makes the returns worth it. You just need to look for the right company with the best freelancers that deliver high-quality material promptly.

Cleaning Services

The increased emphasis on cleanliness and sanitation has made cleaning companies very much in demand today. The clean-and-sanitized mindset and demand will spill over until well after the pandemic making cleaning companies a worthy investment.

Medical and Dental Practices

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With almost every industry brought to a grinding halt by the pandemic, the healthcare industry continued to operate, albeit against overwhelming odds. This proves how valuable the healthcare sector is and all lines of business associated with it.

Knowing how and where to invest can help investors avoid the pains and headaches typically associated with it. While there will always be a certain amount of risk involved, being armed with enough knowledge can help mitigate them.

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