Investing into a small business

Business decisions. Be prepared to give investors some decision-making power. If you are not the majority shareholder, you could be out-voted and even voted out. This gives some entrepreneurs — especially those who want to keep a family-run business — a reason to pause before seeking investors.

Eventual sale or initial public offering IPO. For many investors, the ideal business owner will have an exit plan because most investors are interested in companies that have a high likelihood of being bought or going public. And there has to be a real commitment to a credible exit strategy in three to five years. Many investors are also motivated to mentor you, sharing their experience and skills, to ensure the venture in which they placed their funding is going to succeed.

Your investors may also have professional and financial connections that can help your business grow. The level of their involvement will vary by the type of investor as well as the personality of that individual or the approach of that investment group. While the below types of investors can provide funding at any point during your startup journey, some are more suited for pre-launch and early stages of growth, while others may be more beneficial as you prepare to sell your company.

Angel investors An angel investor may be an individual or a group. These investors generally invest early using their own money. Like most investors, they want to find companies that have the potential for growth and will result in a good ROI for them. These lenders connect entrepreneurial borrowers directly with investments through a brokerage website that will set the rates and enable transactions between both parties. Venture capitalist VC Venture capital VC is generally provided by a VC firm, which manages finances from many investors and looks for very specific types of companies to invest in.

They invest in high-risk opportunities that have high ROI potential. This is the outcome most VC firms desire, and it will likely influence the way they steer your business. There are two main types of VCs: early-stage and late-stage. An early-stage VC is looking for companies that have proven their concept and are generating some revenue. These companies have reached a point where funds are needed to build out sales and marketing efforts so that they can grow.

This funding would be for companies in Series A and potentially Series B. These companies are generally known in their market and may be ready to expand into other markets. The risk to investors may potentially be lower at this stage as the company may be cash-flow positive and have a solid understanding of how to grow. Know These 5 Funding Rounds ] Crowdfunding The internet has made raising funds from non-professional investors even easier.

If you do decide to seek funding from investors, your next step is to figure out how to draw them in. What is it that makes an investor decide to put money into one business over another? Past performance data More than anything, early-stage business investors want to see a return on their investment ROI. If your company has been up and running for a while, then you need to show excellent financial performance so far. This number lets investors know the amount of profit a business makes before sales and administrative costs.

By looking at this number over many months, investors are able to determine whether or not your revenue is consistent. Sometimes spikes in sales, and therefore income, are caused by ad-hoc events such as marketing campaigns or product launches. As much as possible, you want to show investors that your cash flow is steady month to month.

This term is particularly relevant for subscription businesses. For that reason, investors generally look for low churn rates. Customer acquisition: How much does it cost you to acquire a customer? It can sometimes take a lot of investment to bring new customers through the door. While spending money is necessary to build a business, investors will still look at these numbers to determine whether your revenue growth can handle the ongoing expense.

Revenue per employee: This metric is useful for measuring how efficient a business is when it comes to utilizing its employees. A high revenue-per-employee metric shows investors that your team is working efficiently. The reverse, however, can be an indication of poor management, overstaffing, and other inefficiencies. Liquidity: This is the amount of available cash a company has on hand, i. This number allows investors to see whether or not the company can cover its expenses over the coming year.

Convey to investors what it is about your product or service that makes it stand out. Is there market potential for your unique product? Does it solve a unique problem? Is it a brand-new innovation or invention? A market for your product or service Your job is to convince investors that not only is there a big enough market for your product, but that your place in that market is a sure thing. You also need to make sure your requested investment capital makes sense.

A strong narrative Investors hear a lot of pitches packed with hard data. So, given two companies with similar projected returns, what makes an investor choose one over the other? Your story. What need is your business going to meet? How will it change the world? What makes it special? Opening you pitch with your story is a great way to set the tone and draw your potential investors in. Background and experience Your business idea is only a small piece of what will push a company to succeed.

The other piece, of course, is you.

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Small business owners are already stretched thin, and some investments can not only be risky, but also distracting and time consuming. Investment Options and Rules for Different Company Types If you choose to invest as a small business your options will vary depending on the type of business it is. Here are some things to consider, depending on the structure of your business.

Partnerships and Sole Proprietorships Partnership accounts themselves are not taxed, the taxes instead are applied to each partner and recorded on personal income tax returns. Similarly, with sole proprietorships the business owner and the business itself are treated as one unit when it comes to taxes and liability. Limited Liability Companies Limited liability accounts receive some of the same perks as partnerships, as well as corporations.

LLCs are treated with pass through tax status like partnerships, and they also have limited personal liability like corporations do. Corporations Corporations are able to obtain assets, undertake contracts, sue others or be sued themselves, and be taxed all as a corporate entity.

If your business is recognized legally, then you can have an investment account as a business entity. You can begin to learn by investing in some stocks—if you do it on your own you can avoid fees and begin with a low amount, Certified SCORE mentor Martinez suggested. Opt for investing in individual, non-callable bonds held to maturity, or equity indexes.

Have a long-term view of three-to-five years. Alternatives to stock investments include index funds and ETFs, which offer low-cost broad market exposure, and often diversification as well, Alozie of Greenwood Capital Advisors said.

He added that for a little higher price tag actively managed mutual funds can provide access to professional investment management and security selection. Alozie suggested that businesses that just want to earn higher than the bank savings rate may consider investing in a money market account or using cash management services from a bank that will invest in lower-risk bonds with high liquidity and short maturities. In turn, this ownership gives you the right to a percentage of the profits.

The percentage of profits is typically equivalent to the percentage of the share you hold in the company. Caution: An equity investment in a small business can give you the highest returns but has also the largest risk. In fact, to invest in a local business you can also use what is known as sweat equity.

Debt Investment Definition: A debt investment is when you give a small business a loan with the expectation of being paid back the loan in full plus interest. The loan will typically be repaid in installments over a specific time period. In other words, if the company can, it will repay its debtors first and its equity investors last. Equity-Debt Hybrid Investment If you want to be an investor in a small business without committing to just equity or just debt financing, I have a solution for you: The equity-debt hybrid.

Equity-Debt Hybrid Definition: Small businesses may also combine elements of equity and debt financing, selling shares known as preferred stocks. The equity-debt solution may work to give you: Nonvoting rights Can convert to common stock Higher dividend yields than bonds debt instruments And in the event of bankruptcy, the small business will repay its preferred stockholders before its equity investors. The Bottom Line: Investing in a business successfully comes down to your level of comfort with the pros and cons of each type of financing.

How to Invest in Small Businesses A small business investment opportunity can help many business owners make their dreams a reality.