Investing in Small Businesses – Focus on the Local Economy

Investing in small businesses is a great way to help out your local economy while hoping to see a good rate of return on your investment. The one thing to keep in mind, however, is to never put in more money than you can afford with any small businesses venture, no matter how promising it may be. There is always a risk involved with any type of investment, and there’s no way of knowing how any local business will fare in any economy, let alone during a recession. Only use funds you have previously set aside for investments. Do not borrow against your retirement, your kid’s college education fund, or use money that needs to go toward medical expenses and other loan repayments. This is a good rule of thumb no matter the investment.

Keep in mind that the state doesn’t go through the hoops of evaluating a particular investment, so even if the small business has filed with the state to sell off securities doesn’t mean that the investment is sure to pan out. A better way to spread your investment around while cutting down on your portfolio risk is to invest smaller amounts into multiple businesses. When investing, remember to avoid putting all of your eggs in one basket.

Do some analytical work before going with a particular company. Find out how long they have been in business. Start-up investors may be asked to pay more than what the shares are worth. You also want to find out how much experience management has and how successful the managers were in previous ventures. This will be a good indicator of how successful the current business venture might be, although it’s not a guarantee. Find out if the business’s marketing plan is realistic and if the company has the resources to market adequately.

The small business sector was hit hard by the economic meltdown, but investing in small business loans could prove to be quite lucrative. Invest in peer-to-peer lending if you have the funds available. This is simply lending that occurs directly between individuals without the intermediation of banks or other financial institutions. You control how much interest you charge on the loan and you may be able to help out up-and-coming businesses that otherwise would not have qualified for monetary help from major banks. Check out peer-to-peer lending clubs if you want to start such an endeavor but don’t currently have funds available. A good credit score may be all you need to get started.

About Richard Wilson