Investing in business entities in the early stages of their development presents an excellent opportunity to grow your wealth, especially when compared to more traditional investment strategies. Although less common, investing in a small business can net you returns several times higher than investing in publicly traded companies.
If you want to build long-term strategic assets in your portfolio, growing and nurturing small businesses should be one of your key priorities. To help you find out get on the right track, in this article we break down the various types of small business investments and how you can get started building wealth and growing revenues.
Small Business Investing 101
Let’s start with the primary question: how does investing in a business work?
Regardless of whether the business in question an early-stage startup or a major multinational corporation is, the same basic rules apply to both.
Investing in a business is done by taking a debt or equity position in a company. While it is true that both can deliver promising returns, they hold some important differences that need to be fleshed out.
Equity investments are a form of buying into a business through the acquisition of securities, such as stock. Purchasing an equity investment implies that you have purchased a “claim” to the revenues or assets that the business generates.
Major stock exchanges such as the NASDAQ and the Shanghai Stock Exchange are marketplaces where common stock is bought and sold. This form of “stock” of the most popular equity instrument and is usually what people refer to when they say they are “investing” in the stock market.
Unfortunately, equity investments are often highly unpredictable and, therefore, carry a high degree of risk. Stock market volatility can make the value of each company share fluctuate drastically over even short periods.
However, the market fluctuations that cause share devaluation are usually not a consequence of the company’s fundamentals, but rather other underlying social or political issues.
Unlike equity investments, knowing how to invest money in business debts provides a low-risk method of investing in a small business. Debt instruments experience less volatility in the market, and therefore their value tends to be less erratic over time.
Bonds and mortgage investments are forms of debt instruments. These forms of investment are repaid at a predetermined interest rate and, in the event of a company’s liquidation, bondholders are the first to receive a payout.
What’s the Difference Between Debt & Equity?
Knowing how to invest in businesses begins with understanding the key legal difference between debt and equity investing. In the case of debt investing, the business is borrowing for you, the investor. Rather than taking out a traditional bank loan, the company has opted to secure business funding from individual investors at a stated interest rate.
Alternatively, equity investments offer the investor an ownership stake in the company. Technically speaking, owners of a company’s stock own a portion of the company (i.e., whatever the percentage of the share is) and are therefore entitled to a commensurate share of the revenues and dividends generated by the business.
The Most Profitable Small Businesses to Invest In
When it comes to knowing how to invest into a business, understanding the various types of small business investments can only get you so far. To truly understand how to invest in a business, you need to be able to pinpoint growth markets that have the potential to generate long-term revenue growth.
Below, we’ve detailed some of the hottest small business industries and markets for 2019 and beyond based on current forecasts.
With low overhead and relatively straightforward barriers to market entry, accounting firms present opportunities for growth for small business investors.
Whether you want to start your own accounting services company with licensed, qualified advisors and accountants or want to purchase stock of an established firm, this dynamic industry is poised for growth in the years ahead. Although costly professional designations are required for new accountants, long-term profit margins come in above 18 percent on average.
No matter where you live, everybody needs to consult an attorney from time to time. Therefore, legal services and small boutique law firms will always carry a high and often inelastic demand. Law firms, with moderate overhead expenses, represent solid opportunities for investing in small business entities.
Although the cost of human capital within law firms (i.e., paying lawyers, clerks, and paralegals) can be high, law firms generate high net profit margins on average. The most profitable law firms in major metropolitan areas are able to bring in margins as high as 50 percent. The most profitable areas of legal services include:
- Intellectual property law (i.e., copyright, trademarks)
- Personal injury law
- Criminal law
- Employment law
- Trusts and estates
In today’s economy, skilled copywriters earn more than ever. Thanks to their ability to work remotely, copywriters earn high profit margins. From the convenience of their laptops, copywriters produce eye-catching website copy, advertisements, newsletters, blog posts, and more—all within the confines of a local coffeehouse or public library.
With low barriers to entry and virtually no overhead costs, copywriting and web development present great opportunities for keen small business investors. However, the success of an online copywriting agency depends on its ability to scale which, in turn, requires a team of talented writers that can meet deadlines and keep up with demand.
If you want to know how to invest in small businesses, you should set your sights on dental offices and dentistry clinics. Although dental equipment and human capital costs are high, even the most basic dental operations and check-ups are billable for hundreds of dollars. Consequently, dentistry is one of the most profitable growth industries in the world.
With more and more dual-income households in the United States, fewer homeowners are staying home to focus on domestic duties. Instead, these responsibilities are being placed on the shoulders of cleaning service workers, who perform these routine tasks at a steep markup.
One of the most advantageous aspects of running a cleaning services company is that there is no need to obtain cash flow loans or other sources of quick funding. This is because cleaners can generate strong hourly revenues with very few startup costs or equipment costs.
If you want to know how to invest in companies that are virtually guaranteed to generate reliably strong short and long-term profits, you may want to consider investing in doctors’ offices and clinics. As the population ages, demand for doctors and health professionals will increase in the coming years. Therefore, doctors will be facing steep market demand for decades to come.
While it is true that the labor costs of the medical profession are exorbitantly high, the cost of the medical services can offset the steep bills. Even basic operations or check-ups can generate thousands of dollars in revenue from private insurance companies.
Mobile Catering and Party Services
The rise of the “mobile economy” has created new, in-demand jobs in recent years. With convenience being its main selling point, mobile beverage and catering companies can provide services at parties, weddings, and more at a high markup. Although the startup costs associated with the drinks and food is high, the price tag more than compensates for the cost.
Small Businesses to Avoid Investing In
Knowing how to invest in a business requires you to know where not to invest as well. Since some industries are far less likely to generate a strong profit, it’s important that you stay clear of investing in certain sectors. Below, we list the worst industries to invest in followed by its average net profit margin:
- Oil and natural gas extraction (-7.6%)
- Beverage manufacturing (0.8%)
- Mining support services (0.6%)
- Grocery wholesalers (1.9%)
- Lawn supply retailing (2.0%)
Positioning Your Small Business Investment Strategy For Growth
Sometimes it’s not enough to start your own small business and build it from scratch. Between time constraints, capital constraints, and opportunity costs, there’s a lot that can get in the way of successfully building a small business to generate high, long-term profits.
This is why it can be so important to channel your entrepreneurial vision into a sound investment strategy. When you buy into a business, in the form of a debt or equity investment, you can share the rewards of a small business’s success without having to invest in the serious time and energy commitment of managing it.
Although it’s true that all types of small business investments are risky, and that none guarantee consistently high revenues or capital gains, the market does tend to reward those who invest in a diverse portfolio of small, growth-oriented businesses. Therefore, achieving success when investing in small businesses depends on your ability to find them early and jump on the opportunities when they arise.