Should you be Investing in Small Businesses?

It can be extremely satisfying to invest money in small businesses and to watch them thrive as a result. The rewards will come not only in the form of financial returns, but in seeing an investment help people or ideas reach their full potential. Smaller companies need investment to survive, and with the right support they can offer bigger returns than the major players.

Business piggy bank

Room for growth

A successful, established company may already be at the top of their game, and that leaves little room for future growth. Small businesses have more potential for faster, greater growth, sometimes at an almost exponential pace that would be impossible for a bigger firm. In addition, the share prices for small businesses on the stock exchange – known as the small cap market – are not “efficient”, meaning that stocks are often underpriced and can be snapped up by small private investors with a yen for research and an eye for potential.

Minimizing the risks

The downside is that small businesses are also far more likely to fail, and it can be difficult for the independent investor to spot which small businesses have the potential to thrive and those doomed to failure. This is why getting professional advice is essential, and knowing how much to invest is just as important as deciding where to invest. Anyone planning to invest in a small business should first calculate their net worth, especially if they’re investing their savings in order to enjoy a comfortable retirement. Professional advice is vital, and you can work out your net worth with Fisher Investments’ free guide and plan a strategy for your retirement based on how, what and where to invest.

Types of investment

The straightforward way of investing in a small business is by buying equity in the form of stocks and shares. Depending on how much is put in, this could give you, the investor, a say in how the company is run, as well as a financial interest and possibly an annual dividend. Not all small businesses are listed on the stock market however, and there are other ways to invest. One is to simply loan them money, which is relatively low risk, but also low return, as the investor only stands to get their money back plus agreed interest, and won’t necessarily share in the company’s greater success.

Another option is angel investment: informally negotiating the terms of an investment in a start-up company. Again, beginners should definitely seek out professional advice when negotiating a deal so that they don’t find themselves getting into deeper water than they can handle. A better option for the part-time investor is to buy into a fund that specializes in small businesses.

The golden rule is to build a diverse portfolio of different business categories that spread the risks over both small and large caps. Inevitably though, it will be the small business investments that feel the most personal, and which gladden the heart if they do well. With the right advice, investing in small businesses can offer steadily increasing financial returns well into retirement.