How to attract investors and make smart investments as a SMB

It can be tough to find extra cash when you’re bootstrapping as a small business owner, so many entrepreneurs look for investors to secure the funds necessary for growth. But it’s not just funding from investors that will inject more money into your business’s financial equation. Investment opportunities should also be a part of your strategy.

investments for small businesses

Investment opportunities to grow your business’s capital

Ultimately, making sure you always have plenty of business capital is key to running a successful company, and investing plays a big role in this. But there are two sides to the coin: you can be the one looking for investors and the one that engages with investing opportunities to grow your own business capital.

The better you are at both, the more likely your company will have the capital it needs to seize opportunities, weather market downturns, and grow. However, many small business owners don’t have a good understanding of how to find the right investors or how to use investments to generate income.

To leverage both sides of the business investment coin, you need to understand how to make your business attractive to investors and what to look for when you’re ready to expand your capital by making your own investments.

Part #1: Making your small business structure attractive to investors

Investing in businesses is a way of life for many companies, individuals, and institutions—but even so, they need a reason to choose your company over the next business when deciding where to invest their money. Cue the million-dollar question: How can you make your business attractive to investors?

Show your proof

Many investors understand that starting from the ground up is no easy task, which is why investors exist in the first place. Still, equity investors are ultimately interested in the potential for profits so you’ll want to show proof that your company is a good investment. You can do this through current and former years’ financials, like:

Be sure to ask ahead of time or do your research on what other documents or data investors will want to see. Venture capitalists, for example, may require more in-depth data on your market to feel confident about their equity investment, while angel investors understand that this data may not be available during the seed stage.

Do your research

You need to prove that your idea, service, or product is viable. That’s why it’s essential to know your product-market fit and understand your targeted industry. You’ll need to have presentable information on this data in the form of quantitative or qualitative market research.

In other words, your materials should answer: “How do I know that my business is relevant? How can I prove that there’s a market for this?” To get those insights, consider conducting research like:

  • Surveys, interviews, focus groups, polling: What does your ideal customer think about this product/service? What would they change or want differently—and can you offer it?
  • Industry trends and patterns: Market research will tell you what you need to know about your product or service’s relevance in the market. How popular is this product/service—and most importantly, is there a need for more or is the market saturated?
  • Competitor research: Identify their strengths and weaknesses. What are competitors doing that works? What are they doing that doesn’t work?
  • Secondary industry trends: Are there other trends relevant to your business that are worth considering?

Step into the spotlight

Some investors will show interest in a startup that’s still in its early stages. However, most will be looking for a business with some presence within its niche, including a clear digital presence and physical presence in your community (if you are a local business).

This is because brand establishment showcases your goals and successes as an entrepreneur. With a bit of internet presence, investors can do their research and quickly decide if they’re a good match for you.

Investors invest in people

It’s often said that investors invest in people, and it’s true: an enthusiastic borrower is a contagious one.

That’s why introducing yourself honestly and sharing who you are, why you’ve started a business, and your future goals are critical when speaking with an investor during your first meeting.

It will be hard for investors to ignore your presence when you have a clear goal, an actionable plan, a good business idea, and a personal story. That means that you, as the borrower, are an asset too.

Types of small business investors

There are numerous ways to find an investor for your business. If you’re just stepping into the world of business investments, you only need to focus on the main ones for now.

The most common business investors for small-to-medium-sized companies are financial institutions, angel investors, and venture capitalists. Small Business Investment Companies (SBICs), which are licensed by the Small Business Association, are also a viable and valuable option.

Angel investors

Angel investors are wealthy individuals who use their own money to fund what they believe will be profitable businesses. They are interested in startups during the seed and early stages because they like to be involved from the get-go.

They will provide financial backing in exchange for debt or ownership equity—but it’s essential to remember that the more money an angel investor puts into your businesses, the more they’ll expect for their return on investment (ROI).

Most angel investors will expect a 30% return on their investment within a timeframe of five to seven years. However, some may cash out earlier.

Although angel investors like to help build businesses from the ground up, they prefer to work with individuals who have an established business plan, financial projections, and an exciting idea, product, or service.

If your business is a little further along, a venture capitalist might be a better fit for your funding needs.

angel investor vs venture capitalist

Venture capital

A venture capitalist, also called a VC, is a  private equity investor. Venture capitalists are usually firms or organizations, like investment banks, or independently wealthy individuals who already have several investments. 

When a venture capitalist decides to invest in you, they believe that your business has excellent growth potential. They will offer capital in exchange for an equity stake in the company, somewhere between 25 to 55%. They typically stick to startups and small businesses looking to expand. 

The keyword here is “expand.” Think of Shark Tank, the television show. In each episode, entrepreneurs, startups, and small business owners present their business plans to a panel of independently wealthy investors—or venture capitalists.

More often than not, these entrepreneurs have already been in business for quite some time, have made significant sales, and have the financial statements to back their position up.

Venture capitalists are more interested in investing in businesses like these, which have already gotten off the ground but are looking to expand and commercialize their products or business idea.

But VCs won’t simply invest in a vision—even if you have what seems like the best business idea in the world. They want to ensure that they’ll get a strong ROI.

Therefore, VCs are looking for individuals who already have a keen sense of their goals, business plan, and overall financial health. You may have to provide essential data like past income statements, marketing plans, financial projections, and more before they’ll invest in your business. 

Part #2: Choosing small business investment opportunities

You may look for investors to help get your business off the ground. The extra money can help you expand a physical store, focus on marketing, upgrade some equipment, or even pay off debt.

But you could also look for your own investment opportunities as a way to generate income and expand your business capital. And don’t worry: You don’t have to be an experienced investor to start making money. You could still use this route even if you’re brand new to investing as a small business owner.

Before you jump the gun, it’s first essential to understand how investments can help with your business’s capital, debts, and expansion. As an entrepreneur, you can invest in several types of assets, but the most common ones are ownership, lending, and cash.

These investment opportunities all have their advantages and drawbacks, so be sure to do your research before making any commitments. Here’s an overview of what you should know about choosing investment opportunities as a small business owner.

Type #1: Ownership

An ownership investment is when an investor becomes a partial owner of a company or property by purchasing stocks, real estate, or mutual funds. Like the investor you might have sought for your own business, you’re buying into a company with the hopes of an ROI.

Type #2: Lending

With lending investments, an investor buys debts—or bonds—from a company and expects to be repaid the original amount plus the coupon rate. Your business can generate income from the interest paid on the bond.

Type #3: Cash

Cash investments are low-risk investments that help grow the money you already have. Some people choose this route to grow their cash while they search for other investment options.
In this category, you can choose between money market accounts (MMAs) and certificates of deposit (CDs), which are typically short-term and only last a few months or up to five years. Both provide an ROI via small interest payments.

Investing concepts: What to know before you invest as a small business

When it comes to wealth-building for small businesses, making meaningful returns starts with smart decisions—and making wise investment decisions comes down to a combination of knowledge and strategy.

Take a look at the stories of these three self-made millionaires who started with smart investments:

  • Robert Martinez, CEO of real estate investment firm Rockstar Capital, invested $1.25 million in a multifamily real estate project and received total cash on cash returns of $3.7 million.
  • Kara Goldin, CEO of Hint Inc. and The Kara Network, invested in stocks early in her entrepreneurial career and recommends that all small business owners use this as a starting point.
  • James Daily, the founding partner of Daily Law Group, invested $200 in Microsoft in 1992 when shares were $2.39 each and saw an ROI of $81,600.

Whether you’re brand new to the investment game or have dabbled a bit in the past, some investment concepts and guidelines will help steer you in the right direction. Here’s what you should know before getting started.

#1: Learn key terms for investing with clarity

As soon as you enter the realm of investments, you’ll run into financial jargon that may sound foreign the first time around.

Knowing the proper terminology will help you understand what your investment advisor is saying. But it will also ensure that you’re not missing out on important information or asking the wrong questions.

Risk and return

Risk and return are two separate but connected aspects of investing. Risk refers to the possibility that your investment will lose money, while the return is the profit you make on your investment.

The relationship between the two is meaningful because one can’t work without the other. When you look at risk in investing, it’s really about someone using money to try and make more money (a return). Without some level of risk, you can’t expect a return.
Low-level risks, for example, will offer low-level returns—while the risk-return tradeoff principle argues that the higher the risk, the higher the potential return.

ROI

An ROI, or return on investment, refers to the profit you make from your original investment.

return on investment formula

The potential ROI is the entire reason people invest in companies: They put some money down with the hopes of getting more back.

Company maturity

Company maturity refers to the exit strategy that occurs when investors are moving on from their investments. For example, if a company requests debt financing from an investor, there will be a predetermined end-date when the payback plus interest is due. This is called the “maturity date.”

Risk diversification

Risk diversification refers to investing across multiple asset classes at the same time. The objective is to reduce the amount of overall risk in your portfolio by spreading it out through different types of investments. So, if one asset performs poorly, another asset may help cover the loss.

Dollar-cost averaging

Dollar-cost averaging is a strategy that investors use to reduce the volatility of a significant investment.

This strategy consists of dividing up the total amount to be invested across several periodic purchases so that a large sum is not invested all at once. This is a suitable method for those who have consistent income but don’t want to take on the risk of investing a large amount at once.

Inflation

Inflation is the general increase in the prices of goods and services from one year to the next. Inflation can affect the appreciation of your investment over time—which could lead to significant losses or major gains.

Asset allocation

Asset allocation may vary over time depending on your preferences, how much risk you can tolerate, and how much you have to invest.

Allocating your assets involves dividing your investments among certain asset classes, such as committing 34% to mutual funds, 16% to real estate, 14% to equity investments, and 10% to debt investments. The idea of asset allocation is to balance risk vs. reward according to current trends and your risk appetite.

#2: Think about the purpose of your investment

Investing starts with one question: Why do you want to invest?

Don’t invest for the sake of investing or because somebody recommended stocks that are great to buy right now. You want to be sure that you’re well-educated on the journey of investing—otherwise, you could find yourself with losses rather than returns.

So before you get started, take time to evaluate your commitment to investing.

Know why you’re investing

While investing is an excellent way to build wealth, not every investment is a good one. So ask yourself:

  • What constitutes a good investment based on your business’s values, principles, budget, and future goals?
  • How will investing help increase your investment capital, diversify your portfolio, and put you on the right path in the long run?
  • What methods work best for your current business goals? For example, could you consider risk diversification or dollar cost averaging? Both are different approaches, so it’s essential to evaluate your goals against your risk tolerance and choose an investment strategy that best suits your circumstances.

Conduct your research

It is helpful to understand your own risk by looking at liquidity, tax implications, volatility, and inflation, but you also need to consider market trends.

Doing some research can help you understand where your company is going based on current trends. You can gain insights through quantitative and qualitative research, which are helpful forecasting methods that many small businesses use to make decisions and predict their future financial health.

#3: Understand the cost of investing

Unfortunately, investing is not as easy as handing over your money and generating a guaranteed ROI in a few months or years. Investing costs money beyond the initial principal, and over time, fees—even if they’re small—can significantly impact your investment portfolio.

Transaction fees

Transaction fees are fees charged every time you buy, sell, or exchange an investment, like a stock or mutual fund share. For example, you may have to pay a broker’s fee when trading in the stock market. Typical transaction fees are markups, sales loads, and surrender charges.

Ongoing fees

Ongoing fees are fees that you may regularly incur, such as an annual operating expense or maintenance fee. Ongoing fees should be a major consideration when you start your investment portfolio because the fee reduces your investment balance.

Investing as an SMB: What business investment opportunities should you look for?

Another million-dollar question that most small and medium-sized businesses face is, where do you start?

Take a look at your balance sheet and consider your business operations and income: Do you have anything that helps increase your business’s total value? What assets do you have? What appreciation can you expect, if any?

There are many ways to increase your capital—and investing is one of them.

As a small business owner, it’s vital that you don’t jump into the deep end before you’ve treaded water first, which is why equity and debt investments are among the most common investment opportunities small businesses use.

There are plenty of debt and equity investments that come with low-to-medium risks, so you’ll be likely to earn a reasonable ROI that can help improve your balance sheet.

Type #1: Equity investments

Equity investments are when an investor purchases shares of a company to earn dividend returns or to make a profit by selling them when they increase in value. Equity investors may invest in shares, mutual funds, private or public equity, and retained earnings.

How equity investing works

Once you invest in a company’s shares in the stock market, you obtain partial ownership based on how much was purchased. In this context, business owners sell a stake in their companies in return for a cash investment from you, the investor.

As an investor, you can make a return in different ways—through dividend income or capital gains.

Dividend income is the money you earn from dividend payments, which are usually paid out every quarter. Not all stocks pay a dividend, however.

You earn capital gains when your share in the asset has increased in value, and you sell or trade it back on the stock exchange for profit.

Businesses invest in other businesses all the time. The West Harbor dining and entertainment project on the coast of Los Angeles, California, is an example of business equity financing for capital gains.

The West Harbor project managers secured $35 million in equity financing from Osprey Investors. That means Osprey Investors purchased $35 million worth of shares in the project—and, therefore, likely expect to see a reasonably high ROI if the share value increases.

Advantages and drawbacks of an equity investment

There’s a reason investors choose to partake in equity investing, and it’s because of the risk-return tradeoff: Equities generally offer good returns.

However, as with most things, stocks are volatile, and share markets are sometimes unpredictable. This can be hard to deal with—primarily when you’ve invested a lot of money and things aren’t going your way.

Do your due diligence and perform research by checking trendlines and factors like a company’s debt-to-equity ratio and price-earnings ratio before making any decisions.

Type #2: Debt investment

A debt investment is what it sounds like: It’s a type of investment that investors make in a company by purchasing a portion of their debt. The debt is then paid back plus interest.

The keywords are “plus interest” because that’s exactly where your ROI will come from. Debt investments can be bonds, property (like vehicles), and real estate (like mortgage loans).

How debt investing works

It’s not uncommon for businesses of all sizes to seek debt financing—in fact, it’s a helpful way to facilitate growth.

When small businesses are just starting out or expanding, they need money to pay for operations and other expenses until they start generating more revenue.

That’s where debt investors come in. They provide funding, and then the business will pay back the investor with interest. But large companies issue debt to investors too, usually in the form of corporate bonds.

An excellent example of a larger entity looking for debt investors is billionaire Elon Musk’s endeavor to buy Twitter. Musk evaluated debt packages, including debt financing from investors like Morgan Stanley and Apollo Global Management.

When the deal went through, these investment firms and banks provided financial backing to Musk for Twitter’s purchase, and he’ll be expected to pay them back plus interest over time.

Advantages and drawbacks of a debt investment

Debt investments are much more predictable than equity investments because they generally provide a steady flow of income over time, making them a low-risk, passive investment. However, with debt investments, you risk running into taxation: If the payback period is longer than three years, investors face a 20% tax penalty.

Making business investment opportunities work as hard as you do

Whether you’re looking for an investor or the next investment opportunity for your business, you need the right tools to help you stay on top of all your financials.

With a clear view of your income statements, balance sheets, and cash flow, you know when you’ll need investors to help you increase capital and how well your business investments are working for you.

That’s where Divvy comes in: As an all-in-one expense management solution, Divvy is a one-stop destination for everything you need as a business owner looking for an investor or an investment opportunity. Learn more about Divvy today.

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