How To Invest In A Small Business

Small businesses are major drivers in the economy, accounting for nearly 63% of new jobs. And they are growing in number. According to the U.S. Small Business Administration (SBA), 1.07 million new small businesses opened in 2023.

If you don’t want to launch a business yourself, you can still benefit from their role in the economy by investing in them. Investing in small businesses is an excellent way to support the growth of entrepreneurs and diversify your investment portfolio.

However, investing in a small business can be risky, so understanding the risks and diversifying your investments is key.

Featured Partner Offer

J.P. Morgan Self-Directed Investing

Up to $700 with qualifying deposits

J.P. Morgan Self-Directed Investing

On J.P. Morgan’s Website

INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Ways to Invest in Small Businesses

Funding is a serious concern for business owners. According to a 2023 survey from Goldman Sachs, 77% of small business owners said they were concerned about the availability of capital. Therefore, money from everyday investors can help owners and entrepreneurs launch new companies, expand operations and hire employees in their communities.

When you invest in a small business, your investment takes one of the following forms:

Equity investment: With an equity investment, you buy a portion of the business. You become a partial owner. In some cases, you have a voice in how it is run and its future direction. If the business performs well, you can make money by receiving a share of its profits or by selling your stake at a higher price.
Debt investments: If you make a debt investment, you act like a bank. You lend a specific amount, and the business typically agrees to repay the money with interest.

You don’t have to be on “Shark Tank” to invest in small businesses. You can become an investor in several ways.

1. Angel Investor Groups

Angel investors are a top source of capital for small businesses. In 2022, angel investments in the U.S. totaled $22.3 billion.

An angel investor is typically someone with a high net worth who invests in small businesses. They may participate in angel investor groups made up of several investors that meet to evaluate and invest in businesses.

To join an angel investor group, you generally need to be an accredited investor, meaning you must meet the standards outlined by the U.S. Securities and Exchange Commission, or SEC. An accredited investor must meet certain criteria, such as:

An annual income that exceeds $200,000 ($300,000 if married)
More than $1 million in net worth
Certain professional financial credentials, such as a general securities representative license (Series 7) or investment adviser representative license (Series 65)

Some angel investor groups target businesses in specific geographic areas, such as the Northwest, or certain demographics, such as women-led businesses.

You can find angel investor groups near you through the Angel Capital Association database or the Angel Investment Network.

2. Crowdfunding Platforms

Angel investors tend to have high net worths and incomes, so joining an angel investor group may not be feasible for most people. If your income or net worth are lower, you may find it easier to invest in small businesses through crowdfunding platforms, whose participation requirements can be less restrictive.

Those platforms connect small business owners in need of capital with pools of investors. You can invest as little as $100 in a company, and you can choose which companies to invest in based on their mission, industry or location. Some popular crowdfunding platforms include:

Mainvest: Mainvest carefully vets the businesses that apply for funding through its site. According to the company, it lists just 5% of businesses that apply for help in raising capital. When you invest, generally you will receive quarterly repayments, but returns are not guaranteed. Mainvest’s minimum investment varies by project, but it’s usually around $100.
Microventures: With as little as $100, Microventures allows you to make equity investments in startups. But unlike other sites, Microventures also allows secondary trading, so you can sell late stage private stock to other investors.
WeFunder: WeFunder allows you to invest in a variety of companies, ranging from tech startups to local coffee shops. You can invest with as little as $100.

3. Word of Mouth and Networking

Investing through word of mouth or networking is a less formal approach, but it is one of the most common forms of small business investing. In fact, a study released by Clutch.co found that 22% of business founders received funding from friends and family within the first three months of starting their business.

If you have a friend, family member or co-worker starting a business, you can invest money to help them get their dream off the ground. However, this type of investment requires a significant amount of trust.

If you pursue this route, be sure to do your due diligence on the business’ plan, operations and outlook. Then, you will have to create a repayment or equity agreement.

Benefits of Investing in Small Businesses

There are many benefits to investing in small businesses:

Potential for higher returns: Investing in small businesses can help you earn higher returns than you would get by investing in the market. The average projected return of most offerings on Mainvest is 10% to 25%.
Support causes meaningful to you: You can choose companies and founders whose principles and practices matter to you. For example, you can invest in companies whose goals align with yours, like businesses that create sustainable products or energy-efficient devices.
Increased control: When you invest in the stock market, you become a shareholder, but you don’t have input on how the business is run. However, when you invest in a small business, you can become a partial owner. If your stake is large enough, you can help shape the business’ future.

Risks of Becoming an Investor

Investing in small businesses can be appealing due to the high potential returns. But there are some significant drawbacks to keep in mind:

Businesses may fail: It’s very hard for a small business to survive. According to the U.S. Bureau of Labor Statistics, just 47.1% of businesses launched in 2017 were still open in 2023. The numbers get more dismal for older companies. Out of the businesses started in 2010, just 28.8% were still open in 2023.
You may lose money: Although investing platforms advertise high potential returns, it is important to remember that no returns are guaranteed. And past performance does not assure future returns. With the high percentage of businesses that fail or struggle to break even, there is a good chance you will lose money.
Fraud: As with other investment opportunities, business investing has the potential for fraud. Look out for red flags like promises of guaranteed returns, representatives who claim to be part of major firms or high-pressure tactics to get you to invest.

How Much to Invest in a Small Business

When thinking about how much to invest in a small business, keep in mind that there are limits to how much money you can invest. If you want to use equity crowdfunding platforms, there are strict regulations you must follow.

Because of the risks involved, the following investment limits apply:

If your annual income or your net worth is less than $124,000, you can invest up to $2,500 or 5% of either your income or net worth, whichever is greater, over a 12-month period.
If your annual income and your net worth are each equal to or greater than $124,000, you may invest up to 10% of your income or net worth, whichever is greater, up to $124,000.

Here are a few examples:

Annual Income	Net Worth	Limits	Maximum Investment Amount Over 12 Months
$50,000	$50,000	5% of your annual income	$2,500
$100,000	$75,000	5% of your annual income	$5,000
$130,000	$150,000	10% of your net worth	$15,000

The only way to contribute more through those platforms is to become an accredited investor. If you meet the standards, there is no cap on how much you can invest.

Funding Startups and Small Businesses

Investing in small businesses can be rewarding. You have the potential for high returns, and you can support businesses in your local community or that match your interests or values.

However, investing in small businesses is risky. It is vital that you understand the risks and take steps to protect your finances. Investing in small businesses should make up only a cautious portion–probably relatively small–of your overall investment portfolio. Diversifying in other investments, including the stock market, index funds or real estate, can help offset any losses over the long term.