What You Should Know Before Investing In a Small Business
Whether you’re a seasoned investor, or just dipping your toes into the scene, there’s a way you can invest in small businesses in your neighborhood. Investing in small business is a great way you can connect with your community, diversify your financial portfolio, and (potentially) earn a return!
Learn more about the ways you can invest in small businesses, and what you should know about a business before deciding whether to invest.*
Can I invest in a small business?
You might be thinking, “I’m not exactly Warren Buffet, how can I possibly invest in a business?” For so long, individuals like you have been kept from investing in businesses, as federal regulations only allowed accredited investors to put their money into these kinds of ventures.
An accredited investor, by the way, is someone with a net worth of $1,000,000 or an annual income of $200,000 or more. That’s a very small selection of people out there, so what about the rest of us?
The JOBS (Jumpstart Our Business Startups) Act allows anyone over the age of 18 to invest up to $2,200 a year at minimum through a regulated platform, like Honeycomb. You can invest as little as $100 in a campaign on Honeycomb, meaning that you conceivably can invest in a minimum of 22 different businesses in a year!
This is great, because it allows investors who might be younger, who might not have an immense net worth quite yet, or people from less economically-mobile backgrounds the opportunity to invest.
These investors often are compelled to invest in small businesses for reasons beyond the return they can possibly make. Usually, they invest because they believe in small businesses, they want to support their local economy, and they want to put the money into something that they believe in.
So, that’s a long-winded way of saying, YES, you absolutely can invest in a small business.
What kind of investing are you looking for?
Ok, let’s get into the details. There are many different types of investing you can look into, and when you’re looking to invest in a small business, it’s usually going to be either investing in debt or equity.
Both methods of investing have their merits and drawbacks, and your choice of them depends on your own comfort level as an investor. Usually, it’s suggested to have a mix of different investments in order to diversify your portfolio and reduce risk.
The main difference between equity and debt is that with equity, you’re offering a sum of money in exchange for a percentage of the profits that the business is going to generate. There are some pros to this, such as you have the chance to make large returns, and you get to have ownership in the business. However, it’s also quite a risky means of investment. Say the business doesn’t end up being as profitable, and you’re not really seeing a great return on your investment.
Debt investing, on the other hand, is when you offer a loan to a business in exchange for your principal to be paid back, plus interest. This is usually known as a fixed-income investment. Usually, the amount of interest you receive from the loan depends on the risk you’re taking in investing in the business. You have a much better idea of how much you’re going to ultimately make from the investment (though nothing is set in stone, with any kind of investing).
Essentially, equity investing can be a lot of work and risk, for something that has as much a chance of not giving a solid return as being profitable. Debt investing, on the other hand, still has risk but less of it, with a less volatile return.
What’s the project you’re investing in?
It’s important to invest in a project that you are confident will generate revenue - so you’re more likely to make a return on your investment. This could be efforts like an expansion, buying a new location or food truck, or growing their production line. All of these are clear examples of projects that are intended to grow a business’s revenue, which is great for their (and your) bottom line.
Sometimes, businesses are looking for loans to keep themselves afloat. There’s of course nothing wrong with that - in fact, we’ve had several businesses crowdfund loans on Honeycomb that allowed them to remain open or to rehire employees during the coronavirus pandemic lockdowns.
That being said, it’s a great idea to take a look at the breakdown of the project a business is raising money for. On Honeycomb’s platform, each campaign comes with a detailed breakdown of exactly what percentage of the loan is going to go toward what item, so you can have a better idea of what you’re investing in.
How much is the business looking to raise?
The next question you should be asking is how much is the business looking to raise? Is that within your budget, or will you have to link up with other investors?
This matters when you’re investing on your own, but less so with Honeycomb because you get to pick how much you want to invest - as little as $100. It’s also pretty easy to figure out an idea of your return. You can actually see a projection of returns on each campaign as well.
How is the small business perceived in the community?
This is a more qualitative question, but still important. If your business has a positive reputation, if it’s been around for years in your neighborhood, it might be a good investment, because they’re doing something right.
Take Square Cafe, for example. They’ve been around on Pittsburgh’s East End for nearly 20 years, and have amassed a loyal following and stellar reputation in their neighborhood. Even when they moved to a new neighborhood, their fans showed up, and they raised $250,000 on Honeycomb for their move.
Even new businesses can have a positive connection to their community, which could correlate to being a decent investment. If there’s a trendy business in your area that you’re seeing grow rapidly, you might be interested in investing in them to get in on that growth!
How long will it take for you to see a return on your investment?
This is another consideration to take with any kind of investment. Are you cool with sitting for a while before getting your money and return back, or do you want a quick turnaround?
With Honeycomb, you receive quarterly returns, finishing between 3-5 years. However, since there are no repayment penalties, it’s possible that you’ll receive your full return even earlier than that!
How do I go about finding all this out?
Well, when you invest in small businesses on Honeycomb, it’s all there for you. You can look at the business’s story, a breakdown of their funding project, the terms of the investment, and even ask questions of the business owners, all in one easy-to-use platform.
So, are you ready to start the leap into small business investing? Check out live campaigns here, and sign up below to start your account!
*Disclaimer: this is for educational purposes only, and should not be considered investment advice. Investing is inherently risky, and there is always a chance you could lose some or all of your investment.