Here’s How To Effectively Invest In Someone’s Business

In business and finance, investing is one of the most popular methods of making your money mobile. Saved up money in banks actually depreciates their value over time. And with inflation and economic downturns, it loses its value altogether. 

That’s why, for the financially savvy, investing is a better option than saving. It goes on without saying though that you need to have saved up money first before going into investing. When you’re set on taking on investment as a side hobby, you’ll need to make the effort of learning the ropes before going at it full force. Basic investing seminars are always helpful, but to take everything else to the next level, you’ll need to start the grueling process of testing the waters. 

Once you have an idea of the different types of investing and have found out what’s applicable to your financial standing at the moment, then its time to look into investing in someone else’s business. Investment capitalists may sound like some fancy term for people that backs up tech startups in million-dollar bonds, but that’s not entirely true. Almost everyone can invest in a business. Here are some tips on investing in a particular business:

Always read the business plan.

Attending meetings, usually dinners that’s set up by entrepreneurs needing monetary backup, always results in an informal affair. All investors know that entrepreneurs who are pitching always choose the most attractive part of the business: the returns. While this is common and normal, asking for a definitive business plan will make your decision more informed.

It’s one of the basics if you want to know the nitty-gritty of the proposed business pitched in front of you and invest for dummies, but make sure the business is great. Don’t be swayed by the entrepreneurs’ sweet and persuasive words – it’s the first mistake that investors fall into. 

Instead, be swayed by the actual business they’re proposing. A business plan should give you an idea of how the pitchers plan to operate the business, minimize expenses, acquire assets, and earn projected incomes. 

Calculate the risk.

Once you have the projected expense, assets acquired, and the financial statements at hand, calculate the inherent risk of investing in the business. Most proposed businesses fall into two categories: high-risk and low-risk. 

High-risk businesses always tend to have unconventional business processes in their operations. The rule of the thumb is that the success of these types of investments is always 50-50. Low-risk businesses, on the other hand, are those that adhere to a proven business strategy – buy and sell, services, creative work, and such. 

Invest in low-risk businesses if you truly have the interest and heart for it. Because if you’re investing because of the payoff, you’ll be sorely disappointed. Sure, these businesses will rack in income, but not as much as those high-risk investments will do.

Make sure the people who are starting the business have something to lose.

This is very important. For starting investors, make sure that the business you invest in is a passion project by its entrepreneurs. Investigate the pitchers’ line of work, their psyche, and what makes them tick. You can easily tell if a business person’s heart is in its business because they light up when they talk about it.

When the people behind the business have something to lose, it makes your investment safer. The fear of failure will make people do everything to make the business successful, so you have that going for you. If you suspect that a business pitch is just a side project for a businessman, take caution in investing.

When decided, cover everything in writing.

Once you decide to invest in a particular business, always make sure that you have everything in writing. Lock it up and check for all the possible legal issues that may arise when worse comes to worst. Putting everything in a paper – fees, income, promises, bonds, and revenue shares – makes it legal and binding for both parties.

As an investor, you’ll need to keep all the documents on your side in a safe. If it’s a corporation, ask for a copy of bylaws, organizational charts, articles of incorporation, minutes of meetings, etc. For partnerships and sole proprietorships, keep salient documents of their business set-up. Read and learn them as well, so that you know the rules whenever disputes will arise.

Takeaway

Take these tips under advisement every time you are looking into a new company to invest in. One of the most important parts of investing in businesses is to make sure only to invest money that you have. Bear in mind as well that diversifying your investments is a healthy practice. This way, you also diversify and lessen risks.