Small businesses have been called the backbone of the American economy. As such, they need all the help they can get. Investing in a small business is a way investors can not only grow their portfolio but help local business owners on their journey to financial independence. Instead of looking for financing methods that include investors, many owners choose to invest everything into their own restaurant, or dry cleaning business.

Investors offer small business owners different methods of financing that can reduce the stress on their personal assets. Many do not even know of different methods of financing available, besides business loans. These structures also protect personal assets. Whether you are considering investing in a small business by founding one from scratch or buying into an existing small company, there are typically only two types of positions you can take—equity exchanging Phoenix Cab Company for ownership How To Invest In A Company profits or debt lending money.

Though there may be countless variations, all investment types lead back to these two foundations. When you make an equity investment in a small business, you are buying an ownership stake or a "piece of the pie. The business can use this invested cash for a variety of actions—capital expenditures needed for expansion, cash for running daily operations, reducing debt, or hiring new employees.

Consider the investment partnerships Warren Buffett ran in his 20s and 30s. The limited partners were fine with this arrangement because Buffett was providing the expertise. If expenses run higher than sales, part of the losses get assigned to investors. If it turned into a bad quarter or year, the company might fail or go bankrupt. However, if things go well, returns can be generous.

When you make a debt investment in a small business, you loan it money in exchange for the promise of interest income and eventual repayment of the principal. That means if the company goes bust, the debt has priority over the stockholders the equity investors. Generally speaking, the highest level of debt is a first mortgage secured bond that has a lien on a specific piece of How To Invest In A Company property or an asset, such as a plant or factory.

For example, if you loan money to an ice cream shop and are given a lien on the real estate and building, you can foreclose upon it in the event the company implodes. It may take time, effort, and money, but you should be able to recover whatever net proceeds New York Boot Company can get from the sale of the underlying property that you confiscate.

The lowest level of debt is known as a debenturewhich is a debt not secured by any specific asset but, rather, but the company's good name and credit. This is generally a bond, issued as a loan without collateral with fixed payments and interest.

As with many things in life and business, there is no simple answer to this question. If you had been an early investor in McDonald's and purchased equity, you'd be rich. If you had bought bonds a debt investment Evans Fruit Company Mosier Or, you would have earned a decent return on your money.

On the other hand, if you buy into a business that fails, your best chance to escape unscathed is to own the debt, not the equity.

Namely, that equity in a business that is debt-free cannot pose any greater risk than a debt investment in the same firm because the person would be first in line in the capitalization structure in both cases. Sometimes, small business investments 4frnt Ski Company the ground between equity investments and debt investments, modeling preferred stock.

In the end, the investment type you should choose comes down to your level of comfort with the risks of debt or equity, and your investing philosophies. Small Business Administration. Washington State Department of Financial Institutions. Securities and Exchange Commission. Ohio University. Corporate Financial Institute. The Balance uses cookies to provide you with a great user experience. By using The Balance, you accept our.

Investing for Beginners Basics. By Joshua Kennon. A first mortgage secured bond requires property, such as real estate, as collateral. Article Sources. Benjamin Graham. Continue Reading.

How to Invest in a Business Bizfluent

Two common ways to invest in a business are by purchasing stock in it or by lending it money. If you become a lender there is a huge variety of debt instruments to consider. It is important that you manage risk by obtaining favorable terms with respect to collateral, interest rates and loan ……