A guide to small business investing

Many people mistakenly assume that if they can get in on the ground floor of a small business then it could make them some big money.However there are certain factors that should consider before investing in any business-regardless of its size.

The most basic principle of investing in a small business is to never make an investment that you cannot afford to lose entirely. You should never use funds that might be needed for other purposes, such as college education, retirement, loan repayment, or medical expenses. Investment money should be just that-money that is earmarked for investment.

You should also never let a commissioned securities salesperson or an officer or director of a company convince you that a small business investment is not risky. Any such assurance is almost always inaccurate and studies show that most small businesses fail. You should also understand that small business investments are generally highly liquid even though the securities may technically be freely transferable. You should know that you will usually be unable to sell your securities if the company takes a turn for the worse. You should also not be lured into thinking this type of investment is a sure thing just because the company has made a filing with the state to sell its securities as this does not mean that the particular investment will be successful. Keep in mind that the state does not evaluate or endorse the investment and if anyone suggests otherwise to you, it is unlawful.

Some financial experts advise that if you plan to invest a large amount of money in a small business, you may want to consider investing smaller amounts in several small businesses. This is because a few highly successful investments can offset the unsuccessful ones. Even if you are going to use this investment strategy you should still not invest funds you cannot afford to lose in their entirety.

You should keep in mind that although there is no magic formula for making successful investment decisions, certain factors are often considered particularly important by professional venture investors. You should take the time to investigate your investing possibilities.Here are some of the questions that should be answered before you invest any money-

• How long has the company been in business? If it is a start up or has only a brief operating history, you should consider if you are being asked to pay more than the shares are worth.


• Are management salaries out of line considering the small businesses stage of development?It is important to consider whether management is dealing unfairly with investors by taking salaries or other benefits that are too large in view of the company's stage of development or by retaining an inordinate amount of the equity of the company compared with the amount investors will receive.


• How much experience does management have in the industry and in a small business? How successful were the managers in previous businesses? Management with a successful track record lead to a more successful outcome for a new business however once again this does not mean a sure thing.


• Does the small business have a realistic marketing plan and does it have the resources to market the product or service successfully? No matter how remarkable the product or service if no one is buying it then you will not be making any money.


• As a final not it is important to realize that almost all public venture offerings make use of a disclosure document, or prospectus. This document may come in different forms and sizes, but it should disclose all factors that are crucial to the proper assessment of the offering. You should read it carefully to find answers you need to make your decision about the investment before offering up any money.