Small businesses have enormous growth potential. However, they need adequate funding to achieve their goals. These small businesses have products ready to go to market and need funding for branding and marketing. Other times, they need funds for research and development. They need funding to grow. One way for small businesses to do this is to take equity stakes. Startups may not have all the funds for capital, especially at this stage of the cradle. This is where equity investments come in.
Equity basically means ownership. It can be said that equity investments involve putting capital in exchange for a percentage of the company’s ownership and rights to potential future profits. Companies get the financing they need badly and investors get a stake in the company based on the number of shares they have bought. This is a standard method used by small businesses to finance their capital and expenses. Even companies like Amazon, Facebook, and Google used equity investments during their formation phase.
Robinhood, Carta, Stock Market Eye, and many other MRI tools have been used by investors to conduct market research and choose the best startup to invest in. Then they contact the company and make an investment offer.
With Fairmint, however, investors can now purchase shares directly from the company’s website. Business owners can use this tool to raise funds for their business. It provides an engaging platform for interested customers, users or partners who support your product and mission goals to gain a stake in your business.
How to invest in small businesses?
Generally, investing in small businesses carries a load of risk. The people who fund most of these startups have done extensive research on their chances of success. Because of the risks involved, the rewards are incredibly large. However, a downside for the small business is that these investors now have a stake in the business. As a result, they have a say in the decisions of the company. So you could call it a win-win for everyone. What does this mean for an individual investor? An individual investor may decide to finance a business as a way to earn partial income. Awesome, isn’t it?
Equity investments in small businesses involve either stocks, venture capitalists, or angel investors. Let’s dive into each:
A small, publicly traded company could get investors to put their money into the company by selling them shares. The number of stocks an investor can buy depends heavily on the company. The company will decide on the number of shares to be offered for sale to the public depending on the capital it seeks to raise. They can also impose a limit on the number of shares an investor can have. All of this in exchange for ownership of the business. However, this carries a risk; in the case of an early stage business, it might be difficult for investors to get their money back when such a business goes bankrupt. As such, an investor should do extensive research on where he is putting his money. Or better yet, hire a fund manager.
Another method of investing in stocks in a small business is venture capital. In their early days, small businesses sometimes cannot obtain the necessary financing on the stock market or by borrowing. They might not have the collateral or the price required to engage in debt financing. This is where venture capitalists come in. Venture capitalists are usually high net worth individuals or institutional investors who invest large sums of money in startups for a large stake. They provide capital to companies that have huge potential in the near future. Thus, bridging the gap of inaccessibility for small businesses. When the startup has reached the growth stage, it could be sold to large companies. Some venture capitalists invest for this reason – to make a profit when the business is sold. Others invest because they really enjoy being a part of something that has the potential to be huge.
Angel investing is another form of small business equity investing. Angel investors, also known as seed investors, unlike venture capitalists, are high net worth individuals who provide almost all or almost all of the financing required for a small business or startup. Most of these wealthy individuals are relatives of those who own the startups and are fully aware of the risk involved. They provide funds in exchange for a stake of up to 50% or more. This automatically makes them an important shareholder who makes decisions. Small businesses may not have access to capital markets; angel investors fill this gap. However, it is essential to note that it can be difficult to find an angel investor due to their risks.
As a business owner, you can use these tools to bring new stakeholders into the business and sell streaming stock right on their website. Companies could add an “Invest” button on their website. It helps your business gain value by converting your equity into a powerful tool for raising capital for business.
Interesting related article: “Investment Information”