Small Business Investing: Essential Strategies And Mistakes To Avoid

The following is a guest blog post:

When thinking of ways to achieve financial independence, the on-growing small business sector might seem like the perfect answer. If you choose to take the plunge and start your own business, no matter how flawless the blueprint might look, there is no guarantee it will be set for success.

Taking a deeper look into the subject, statistics show that only about 70% of small businesses survive the first two years, out of which only two-thirds reach the five-year milestone. Despite these statistics, the idea of investing in a unique project, that could potentially revolutionize the targeted industry and provide financial growth, is a good enough reason for individuals to turn to small businesses. For example, in Canada, around 98% of enterprises are small businesses (under 100 employees) and only 0.3% are large corporations, as 2015 statistics show. Analyzing a bit further, we see that more than half of Canadian small businesses are micro-enterprises (maximum 4 employees).

But what exactly makes a business successful and is there indeed a recipe that can avoid financial disaster? Essentially, there are two directions you can approach, in order to get involved in the small business area: starting your own business or investing in an already existing and rising company. And in both situations, the expectations are quite similar. You invest in a project you believe in and expect an outsizing success.

Investing in your own idea

Even if you think you have spotted out a promising business idea, that could turn into a success, there are a few strategies that need to be implemented to ensure success:

  • Thorough research and business planning

No matter how much you believe in the project you are about to start, realistically evaluating your idea and keeping an objective outlook over the entire plan is paramount. The first and most important step is determining your ideal customer. Keep in mind aspects such as gender, age, income and education level, to help you create the profile of your ideal buyer.

After having a clear image of the potential buyer, you will need to conduct a market analysis to determine if the industry has room for your product. Chances are, there are already similar products on the market and in order to distinguish yourself from them, you will need to determine what makes your product stand out. Why should the customers choose your service, over the one they might have already been using for a while now? To answer this question, apart from knowing your product, you will have to be familiar with the competition. Conducting a SWOT (strengths, weaknesses, opportunities, threats) analysis is an excellent way to research your competition.

This information will also help you in the future, when elaborating marketing strategies to advertise your product and attract customers.

A business plan is needed, in order to guide you through the process of growing your idea. There are many types of business plans you can choose from and you can tailor them even more to fit your business. Although, if you plan to seek for investors, following a traditional business plan might be a better option, as it checks all the aspects they typically look for, when deciding to fund an idea.

  • Developing a financial strategy

Establishing the budget for your business depends heavily on the type of project you have in mind. When establishing the financial plan, you need to make sure you cover both the initial investments and future expenses for at least one year. This will give you an idea of the budget you need, before seeking funding. There are various ways to fund your business, but typically entrepreneurs turn to two options:

Non-equity financing: In essence, this means you are borrowing money from a lender, with the commitment to pay them back within a certain time frame and under a set of terms. While not ideal, many people turn to friends and family, or personal credit cards during the initial stages. As the business matures and there is a track record of sales, revenue and profitability, this will open up doors to additional forms of financing, including small business loans.

Equity financing: This translates into receiving funds from investors, while trading partial ownership of your company. This means the investors assume part of the risks, in case of failure, but if your company succeeds, they end up making much more profit than a typical lender would.

A big mistake when choosing equity financing is giving up too much control over your company. This would be the exact opposite of financial stability and independence.

  • Choosing the legal business structure

The business structure you choose will reflect on may legal aspects of your company, from permits, licenses and taxes to name and liability. There are many options you can choose from, depending on your interests, investors and profits and the most commons usually are:

Sole Proprietorship: one person in handling the development and management of the business, embracing both the winnings and losses.

Corporation: Owned by a list of shareholders who elect a board of directors that are in charge of overseeing the overall development of the company. In this case, the company is a different entity than the owners.

Limited Liability Company (LLC): Although it has a lot in common with a corporation, in matters of taxation and legal entity, it has no stock and the owners are referred to as members, not shareholders.

  • Handling logistics

This includes all other physical needs your company has, from location to human resources.

When choosing the location, make sure it fits your business’ needs and determine whether it is better for you to purchase or lease the space.

Again, based on the type of business you are going to run, you have to decide if it’s better to assemble a team or outsource work to contractors.

Investing in promising start-ups

Once you start making profit and gain financial stability, consider investing in other small businesses. This will give you a chance to help someone who is in the same position as you once were and also generate other financial income. When investing in an existing company, analyze and decide whether it’s best for you to lend the money or buy stakes. While equity investments might provide more profit, it is also subject to higher risk and a bad year can cause massive losses.

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