investing

5 things to know before investing in business startups

Beware of the opportunity
Beware of the opportunity © StockLite/Shutterstock.com

It's usually difficult for ordinary Americans to find a private business in which to invest. Unless you're a known local business player and are in-tune with the business community, it's unlikely you'll be approached with an opportunity.

Gregg Landers, managing director of consulting and internal control services at CBIZ MHM, says most small-business investment opportunities come from friends, family or word of mouth. It could be a relative looking to open a restaurant or a friend planning to turn his or her bright idea into a business.

"You have to ask yourself why the opportunity is even available," Landers says. "Usually they are trying to raise money, and it means they probably couldn't get it from a bank. You have to find out the story behind it."

While it could throw up a red flag, the inability for an entrepreneur or startup to obtain financing isn't necessarily a sign that it's doomed. Business valuation expert and CPA David Coffman of Harrisburg, Pa., says it's very difficult for startups to obtain financing nowadays. Even new businesses that can show a couple of years' sustainability can have problems if the bank isn't willing to take a risk.

"Even though they want to lend to businesses, they're just very wary. It's just hard for many of them to get financing, so they'll often turn to friends and family for capital," he says.

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