Is Investing in Small Businesses a Smart Idea?

It is a known fact that America is supported by small businesses and has been almost since the time of its inception. In fact, corporations didn’t come into vogue until around the mid to late 1800s. But although corporate giants do make a lot of money, almost 90% of the businesses in the United States are considered small (employing less than 100 people). So while you can make a lot of money when you put your money in a corporation, investing in small businesses can be just a lucrative if you pick the right ones at the right time to partner with.

The key factor here is picking the right businesses to invest in. This would be true even if you wanted to put your money in a large, well known corporation. The first step to determining which small business to partner with is to learn how to read financial statements. In order to make money investing in small businesses, you need to find ones that are doing well and will provide a return on your money. You need to see if they are growing, how they are handling their money, and whether the company is turning a profit. If any of these things are off then you may not want to partner with them.

Statistically, about half of all new small businesses fail within the first two years and most that make it to their second anniversary don’t live to see their fifth. So no matter what anyone may say, investing in small businesses is risky. You want to check the company’s business plan to see what they are doing to ensure they are going to be around long enough for you to get a good return on your investment. In addition to that, you’ll need to take a look at the market they are in and the experience of the business owner to get a full picture of their chances for survival.

A final but important measure you must take when investing in small businesses is making sure you have an exit strategy in place. This is particularly important if you are only investing for a short time. You need to know how the business’ assets will be liquidated and how they will settle their debts should the unthinkable happen and they go belly up. Although you want to hope for the best, you should be prepared for the worst.

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