A significant portion of successful business people started their journey with a small business. They either owned one or invested their cash in a company other people owned. Small business ownership is one of the most common ways with which people tend to embark on the financial independence journey.
Some of those businesses fail, while others develop into successful enterprises and you might be the key to success. Investing in a small business is a good way to generate profit without having to run your company (it helps, but it isn’t required).
Investing in small businesses – Equity
Equity investment means that you buy off a portion of the company and thus gain the right to receive a percentage of the profit. You will also lose money if the business encounters losses. This type of venture means that you provide money for the firm in exchange for the benefits, and losses.
The owner can use your money for various things, from expanding the company to building the liquidity. Many business owners are open to suggestions, and you can come to an agreement about the subject in which the money will be invested.
The percentage of the profit and loss the investor gets is proportional to the investment, but there are cases in which it doesn’t work like that. If an investor provides only money, then they receive profit that is proportional to the amount of cash they invested. Those that bring expertise, along with cash, to the company will receive bigger cut because they help in the development of the company more than those that have the only money to offer.
Debt investment and how it works
Debt as a form of business investment is the other way to earn money from small companies without doing anything. The risk of debt investment, compared to equity, is almost non-existent, as the owner of the business has to repay you the money you gave them. But low risk means small profit and the amount of money you get out of the venture is minuscule when compared to equity investment.
Low risk comes from the fact that you give a loan to the company owner and they are required (by the law) to return that money to you at some point in future. The said time for recovery is usually found in the contract. You get interested in the loan, and that is why the profit is rather small. A great thing about this form of small business investment is that you will receive your money back even if the company goes bust. Debt has priority over stockholders and other parties that require payment from the enterprise that went down.