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What you should know about small business investing

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Many investors choose to put their money into small businesses because they recognize the potential of a business that can grow and be successful. However, the first rule of investing also applies in this situation. You should never put any money into a small business that you cannot afford to completely lose. The reason for this is that small business investing is extremely risky by its very nature. In addition, you should never use money to invest (in any investment) that you will need to sustain your lifestyle or pay for a large upcoming purchase, such as: buying a home, funding an education or taking care of medical expenses.

Many Investors find that they are talked into investing in a small business, by a persuasive salesperson or someone within the management ranks of a small business. They may try to tell you that this type of investment does not have risk, and this is a false assumption. In addition, they may try to tell you that your investment is highly liquid when in reality most small business securities are sold off, if the business is not doing well. The investor should also keep in mind that just because a small business is selling investment opportunities, you should not assume that it is endorsed by any legal entity. The state or any other regulatory agency does not look into small business investing options, so you should always proceed with care.

Finally, you if you are considering investing in a small business, the investor should plan to diversify your risk. You can do this by either investing in several small businesses, or using some of your investment money, to fund other investing opportunities. This way you are setting up an insurance protection against losing your entire investment since the risk is divided up among several investments.

Successful investors know that whatever investment they are considering will require extensive research, before any money changes hands. This is not different when it comes to small business investing. You need to commit to making the effort to learn everything you can about the small business, and even more importantly the people who will be running the company. Here is some information about what you should know about small business investing-

  • Has the company been in operation very long? This is important because if the business is only a start up or fairly new, you want to make sure you are paying a fair price, for any shares.

  • How is the management running the business? Successful investors know that they are really investing in the people who are running the business and not the products or services they produce. You want to feel comfortable with every aspect of the business' management. You should look carefully to determine if the management is taking salaries or other benefits that are not in proportion to the business. In addition, taking the time to learn all you can about the experience and expertise of the management will pay off in the long run. You want to know if the management will be able to not only run the small business, but help it to grow over time.

  • Does the company have a strong sales arm and effective marketing plan? Marketing and sales is what drives a business' success. If the small business you are considering does not have these, you should consider this a red flag and move on to another opportunity.

  • Do you know enough about the industry to invest? You should never invest in a business that you don't understand. If you are unfamiliar with the business or don't understand the investing strategy, then you should walk away and find a better investment to fit your financial needs and goals.


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