5 things to know before investing in business startups

Tips before investing in startups
Tips before investing in startups © Monkey Business Images/

According to the Small Business Administration, approximately 500,000 new businesses are started every year in the United States. Because it can be difficult to obtain financing, small-business entrepreneurs often turn to friends, family or acquaintances for funding. If you find yourself with the opportunity to invest in a business startup, tread carefully.

Think about liability, the valuation of the business, your timeline and your exit strategy. Before you even consider taking a partnership or jumping on board, here are some basics to know prior to investing in a new business.

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Starting a business can be a challenge, but investing in one can be just as daunting.

If you are asking to invest in a business startup, think about these basics before jumping in. Most small businesses are started by friends or family. Usually they are trying to raise money, and you have to learn the plans behind their idea. You should understand the business structure, and learn whether you could be personally responsible for unpaid bills or liabilities if the business fails. Investors should consider making a business a limited liability corporation, or LLC. Under an LLC, owners are usually not liable for company debts.

Also, people often invest in a business with little more than a handshake, but drafting official documents is essential.

If investors have a particular time frame for a return of capital, they should consider investing via a loan instead. Making an official loan to a startup can give the investor a steady income stream and provide a more guaranteed return of principal.



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