Five Top Tips for Investing in a Business Venture
When most people think about investing, visions of stock charts and IRA spreadsheets may dance through their heads. But investments don't have to stop there. Let's take a look at a non-traditional investment: investing in a small business venture:
Most small businesses are in need of one thing: cold, hard cash. Okay, maybe they need other things like good employees, office furniture or a beefed-up business model. But the original startup coinage is often the top priority for anyone with a business plan. So what do you do if you have the cash but someone else has the idea? Follow along for five must-know tips about investing in a startup company.
Make Like a Bank
Banks have a few ways of determining the risk of any loan they intend to offer, including checking a credit report and asking for a business plan. You can mimic banks by requesting both from any potential startup owners. From there, you can determine the startup company owners' credit worthiness – and their probable ability to handle the books in the new business. The business plan can help you iron out any details needed before you invest...or it can help you run for the hills on a business with no potential.
Write Up a Contract
No business venture is complete (or completely safe) without a contract. As the cash cow investor, you may be particularly vulnerable to a no-contract agreement. So it may be best to schedule a meeting with your attorney to make sure all of your bases are covered in the legalities department.
Keep it All Business
It may be tempting in friendly investments to keep things more casual, but many a family feud has started over money. For that reason, if you're working with friends or family on a business venture, it can be even more important to make sure everything is done by the book. Credit reports, business plans, contracts, deadlines, and business-like attitudes can all help seal the deal without souring the relationship.
Follow Your Gut
When it's all said and done, spreadsheets and business plans can only get you so far. The business has to make sense before you should drop a wad of cash on it. So as you're reviewing the information and talking to your potential business owners, you may want to set aside some time simply to listen to the inner voice. Ask yourself if the business is necessary and if it makes sense. If not, it's time to move on.
Consider a Higher Interest Rate
Most people don't want to gouge their friends and family, but when it comes to funding their business model, it's important to set a decent interest rate. Remember, if they are coming to you for cash, the bank must not have approved a loan, which means loaning to them is a higher risk investment. For that reason, it may be best to charge a higher interest rate to help offset the risk.
If you happen to be seeking an investment opportunity, lending to a small business could be the way to go. However, to keep your money safe, it's often best to request a credit report and business plan, sign a contract, stick to business, follow your gut and set a decent interest rate. Your new business and your fatter pocketbook could thank you.