It is without a doubt that small businesses are the backbone of different economies. For this reason, they need the help they can get. That is why you should not hesitate to invest in business as it is the perfect way to grow their portfolio while at the same time helping local business owners on their journey to financial independence.
Whether you are looking forward to investing in a small business from scratch or you simply want to buy into an existing small company, there are a couple of things to keep in mind. Below are two types of investments you can make in a small business.
Equity Investments
When making an equity investment in a small business, you are simply buying an ownership stake. After all, you provide capital in the form of cash in exchange for a percentage of the profits or losses. The small business can count on this invested cash for a wide range of actions including debt reduction, hiring new employees, or even running daily operations. However, you need to keep in mind it comes hand-in-hand with the most risk.
Debt Investments
With debt investment, you loan small business money in exchange for the promise of interest income together with the eventual repayment of principal. In most cases, the debt capital is offered in the form of direct loans with regular amortization or purchasing bonds issues by the business. The good thing about debt investments in small business has a privileged place in the capitalization structure.
What this simply means is that the debt has priority over the stockholders in case the company goes bust. The highest level of debt is first mortgage with the lowest level being the debenture. Be sure to figure out what goes into these two before deciding on anything.
Whether you opt for equity investment or debt investment in small business, it is in your best interest that you check out the pros and cons of each. Through this action, you won’t regret your decision way after you invest in business.
