Profit Versus Risk: Investing in a Small Business

When it comes to where and how to invest money, it is imperative that an investor is aware of the risks as well as the possible gains. Investing in a small business is a good avenue to place money in a way that can allow it to grow steadily. There are a few options when investing in a business and each comes with its own level of risk versus reward.  

Debt Investment 

This can be a very profitable way to invest in a new business without taking on a large amount of risk. A debt investment will allow a person or group to lend money to a small business in the form of a cash loan or by holding bonds purchased by the business. For example, a new dry-cleaning operation needs money for everything from equipment to dry cleaner pos software. A loan would offer the cash to pay for those things in exchange for interest paid back on top of the loan amount later. A secure investment could be held against a piece of property and if the business fails to pay back, the property can be foreclosed to cover the debt.  

Equity Investment 

When a business offers equity in exchange for startup funds, the investor takes on a much greater risk than a holding a bond against a physical item. The potential for reward, however, is also much greater. Equity investors – or shareholders – are given a percentage of the profits and losses of the business. This can lead to great financial gain for the shareholder if the business does well or better than projected. If the business goes under, the investor could lose a substantial amount instead. 

Learning about the different ways a person can invest in a business is important. Investors should consult with their financial advisor before taking on any high-risk investments. Knowing when to take a chance, though, could lead to greater wealth in the long run.