What makes a small business a good investment?

When you are considering making in an investment in a small business, it is very important that you consider several different factors. The reality is that no matter how good a business looks, from the outside that alone does not make it a sound investment. So before you put your money into a seemingly great small business, here are some factors to consider, helping you determine if it really is a good investment.

• Only invest money that doesn't matter to your financial survival-The first principle of investing is that you should never make a small business 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. The bottom line is never put in more money then you can afford to lose.
• Don't let yourself get talked into anything-You should never let a commissioned securities salesperson, or an officer, or director of a company, convince you that the investment is not risky. Any such assurance is almost always inaccurate, since every type of investment carries some degree of risk.You should keep in mind that small business investments are generally highly liquid, even though the securities may technically be freely transferable. This means that you will usually be unable to sell your securities if the company takes a turn for the worse. Also, you should realize that just because the company has made a filing with the state, to sell its securities, does not mean that the particular investment will be successful. The state does not evaluate or in any way endorse the investment. Keep in mind that if anyone suggests otherwise to you, it is unlawful.
• Don't put all of your eggs in one basket-In other words, if you plan to invest a large amount of money in a small business, you should consider investing smaller amounts in several small businesses. This way you spread out and lower your overall risk.This means that a few highly successful investments can help offset the unsuccessful ones. Again, it should be stressed that even when you are using this strategy, do not invest funds you cannot afford to lose entirely.

Now that you know the guidelines of investing, there are several steps you should take to investigate the small business. These are reflections of certain factors are often considered particularly important by professional venture investors. You need to find out the answers to the following questions, before promising any funds-

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


• Try to determine 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. You should also ask how much experience management has in the industry, and in a small business. How successful were the managers in previous businesses?


• Do you know enough about the industry to be able to evaluate the company, and make a wise investment?


• Does the company have a realistic marketing plan, and does it have the resources to market, the product or service successfully?


• There are greater numbers of public investors are "getting in on the ground floor" by investing in small businesses. When these businesses are successful, these enterprises enhance the economy, and provide jobs. They can also provide new investment opportunities, but any investor must be aware that they should be balanced against the inherently risky nature of small business investments. In considering a small business investment, you should proceed with caution, never invest more than you can afford to lose, and investigate before you invest.