Deciding to invest in someone else’s business can be a big risk, but it can also be a great investment and lead to high returns. In order to minimize your risk, there are a few basic rules to consider following.
Every business, whether just starting up or are looking to expand, should have a detailed business plan that you can review. Never consider investing in any business that does not have a business plan or one that will not allow you to see their plan. The business plan should be detailed enough that you can make an educated projection as to its potential for success and its feasibility. It should also clearly lay out how the business will make a profit and how an investor will see a return on his investment.
It is important to analyze all possible outcomes and what your contingency plan is if the risk turns out to be higher than you expected. Any investor should calculate the downside risk before investing in any business.
Set Investment Goals:
If you have not set your own personal investment goals, it would be the best place to begin. It is also important to not be swayed by friend’s or family’s sales pitches without thoroughly investigating their business plan, comparing them to your investment goals and assessing the opportunity. Commit to investing in businesses that line up with your goals and in which you have personally researched.
Insist on a Detailed Business Plan:
Every business, whether just starting up or are looking to expand, should have a detailed business plan that you can review. Never consider investing in any business that does not have a business plan or one that will not allow you to see their plan. The business plan should be detailed enough that you can make an educated projection as to its potential for success and its feasibility. It should also clearly lay out how the business will make a profit and how an investor will see a return on his investment.
Determine Various Outcomes:
It is important to analyze all possible outcomes and what your contingency plan is if the risk turns out to be higher than you expected. Any investor should calculate the downside risk before investing in any business.
For example, if the business needs additional working capital in the near future, you will need to decide the best course of action. If the business owner is going to have to take out small business loans in order to generate cash flow, you will need to decide if investing is a smart move at this point. You may also need to decide if you are willing to provide additional funding or refuse and allow the business to fail. Every feasible outcome should be considered and what you are or are not willing to do based on the variables.
As an investor, you will need to consider how much working capital you are going to invest in the company. Whether you offer the owner small business loans as equity financing or if you are going to take on the role of an angel investor. You will need to decide how much ownership of the company you wish to take on and how much you are willing to invest overall into the business.
And never forget... The most important rule for any investor to follow is to never invest than you are able to afford to lose.
Consider Cash Flow Problems Ahead of Time:
As an investor, you will need to consider how much working capital you are going to invest in the company. Whether you offer the owner small business loans as equity financing or if you are going to take on the role of an angel investor. You will need to decide how much ownership of the company you wish to take on and how much you are willing to invest overall into the business.
And never forget... The most important rule for any investor to follow is to never invest than you are able to afford to lose.
That is actually a very neat idea. I also like that site where one can make loans directly to people. You review their credit score and history, and then offer an interest rate. Its essentially peer-to-peer lending.
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