Can investing in a small business be more fruitful?

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Date: 10 September 2020

A handsome man picks the juiciest apple from the display

As a nation, we love start-up businesses. How else would we excite our taste buds with new flavours if creative food businesses weren’t popping up on the high street in the form of new restaurants and cafes? Many of our biggest businesses were once start-up business too. They only grew to the size they are today by consistently delivering products and services that their customers love.

The coronavirus crisis has shattered all our ideas connected to financial and job security. Many people are now looking to diversify their income streams to minimise future economic risks. It's interesting to note that whenever we think of making investments for the future, we usually talk about buying shares in a company as we assume stock markets and trade dealings will guarantee success.

Many investors overlook smaller, start-up businesses as an investment option. This could be a mistake. Providing financial support to start-up businesses could be far more fruitful - especially if the business really takes off. But before you consider the possible benefits of investing in a start-up business, you need to investigate whether the business idea is viable and whether it presents an opportunity for growth in the near future. 

Why invest in start-up businesses?

While they might not present a guaranteed, lucrative investment opportunity, the same has been true for many well-established players on the stock market over recent months. Investing in a small business can also offer you tax reliefs on your investment through the Enterprise Investment Scheme or one of the other venture capital schemes. So, you might decide to try out an alternative investment option that presents some potential for future economic reward.

High rewards

It is often said that with high risk comes high reward. An early-stage business is more likely to offer a generous profit-sharing arrangement than an industry giant with boards of directors and shareholders to satisfy. And, with some investigation work, it is possible to find start-up businesses that present a low-risk investment opportunity. Best of all, it's likely you can get hold of their shares at a much lower cost right now. 

Better exposure

Watching a business grow, and being a part of that process, can be a real learning curve. Observing the strategies that make the business a success can also give you valuable industry experience. Investing in a business during its early stages can also put you at the top of the company’s list of preferred investors. This can give you an important 'in' when future investment opportunities arise.

Relationship building

Although you might not be a general shareholder of a start-up company with voting rights, you can still play an important role by investing in a small company. Without financial support, many businesses cannot achieve their full potential.

If you lend support to a friend or family member who is starting out, you can play an even bigger role. Your share in the business and the role you play can be more significant. This can help to strengthen your personal relationship. That said, you should set out a shareholder agreement when investing in a friend or family member's business. It should make it clear how you can end your financial relationship without it impacting on your personal relationship if the investment does not work out as planned.

Any investment opportunity will present risks and rewards. An investment may not deliver the financial returns you hoped for, but this can be true regardless of the size of business you invest in. You should use the same evaluation criteria when considering any investment opportunity and make use of start-up business and investment tools. Ensuring that technology is integrated in your business and investment operations is essential.

Make sure your relationship with any business you invest in is transparent. The company should provide you with the legally required information in their annual returns and shareholder meetings. Ensure you also fulfil any legal and tax requirements.

While an investment in a start-up can reap significant benefits, you need to keep your eye on the ball. Market conditions can and do change, especially in this post-COVID environment. Make sure you maintain a focused approach on the investment outcomes you want to achieve and do not let external factors have an undue influence on your decision making. 

Copyright 2020. Article made possible by site supporter Adam Cifu.

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