If your goal is growing your wealth and building a legacy you can leave behind to your heirs, it’s imperative you invest smartly so your money can grow over time.
Many investors opt to pour their excess funds into the stock market, hedge funds, or diverse real estate portfolios.
However, there are plenty of other ways to invest for the long haul — including investing in small businesses and struggling start-ups.
What are the best ways to invest in small businesses?
This is a tricky question without a single right answer. In other words, it depends.
If you don’t know someone with a strong startup concept or business idea personally, you’ll likely need to consider alternative ways to invest in small business, such as crowdfunding.
This guide was created to help you compare all the potential angles and tools you could use to fund small businesses for profit or as a philanthropical endeavor.
What is Crowdfunding?
Before you invest in a small business, it’s important to understand crowdfunding and how it’s used in the small business world.
Crowdfunding has become a popular way for small businesses to find money to get off the ground or fund various projects.
When you take part in a crowdfunding venture, you are effectively giving money to companies with the goal of helping them succeed.
The payoff for you as an investor can vary, however, depending on the type of crowdfunding project you take part in. Generally, there are two types of crowdfunding campaigns – campaigns through websites like Kickstarter and Indiegogo that promise “rewards” in exchange for your investment, and campaigns that deliver equity in a company.
With the former type of crowdfunding, you can’t expect to receive a financial return on your investment.
Instead, your “rewards” may be a copy or prototype of the new product or an insider’s peek in the creative process behind it.
These rewards may be interesting and valuable in some way, but they won’t help you grow wealth.
With equity crowdfunding, on the other hand, you are investing your money into a company in exchange for a piece of equity in that firm.
This can absolutely lead to financial gains for you as an investor, but it can also lead to losses (including a full loss) if the company doesn’t succeed.
Of course, this is a risk you’ll take any time you invest in a small business.
9 Legit Ways to Invest in Small Business
If the underlying goal of investing in small businesses is eventually receiving a return on your money, there are plenty of strategies and platforms to consider.
Here are a few of the most popular, including some newer options:
If you have money in an IRA, reorganizing your retirement accounts into a self-direct IRA can help provide a means for you to invest in small businesses.
Doing so can allow you to invest tax-advantaged dollars into a small business or start-up of your choice, whether you are personally involved with the company or an angel investor.
It’s important to note, however, that the IRS sets limits for your personal involvement in any business funded through your self-directed IRA. Generally speaking, you can own stock in businesses you invest in, but you cannot own more than 50% of the company.
In other words, you can be one of many investors in a company you support through your self-directed IRA, but you cannot be the main investor.
Using a self-directed IRA to invest in a small business can be a smart move, but you should consult a tax advisor to ensure you choose the right custodian for your funds and don’t break any rules along the way.
I recommend Ally Invest, one of the top online brokerages that offers a self-directed IRA option.
Ally Invest is affordable, easy to use, and comes with comprehensive investment tools that track your progress and provide you with research and market data.
For more options for retirement plans, check out the resources below:
- Self-Employed Retirement Plans
- Keogh Plan – Retirement Plan for Self-Employed and Small Business
- SIMPLE Retirement Plan for Self-Employed Workers
- Solo 401(k) Plan – Individual 401k for the Self-Employed
- SEP IRA – Simplified Employee Pension Plan
LendingClub is a peer-to-peer lending platform that lets consumers borrow money from individuals and corporate investors instead of banks.
This set-up can be extremely beneficial on the borrowing side since peer-to-peer lenders tend to offer looser lending requirements than traditional lenders and large institutions.
High-risk borrowers with bad credit may also be able to qualify for loans they couldn’t get otherwise in exchange for paying a higher interest rate.
While many consumers use LendingClub funds to consolidate debt or pay for home improvements, they can also use the platform to apply for funding for their small business idea.
Generally speaking, business loans in amounts between $5,000 and $300,000 are available through Lending Club with repayment timelines between one and five years.
On the investing side of the equation, this means that you can invest in small business loans that help entrepreneurs get their ideas off the ground. LendingClub reports that most investors earn returns between 3% and 8% on the platform after accounting for defaults.
LendingClub also lets investors diversify their investments across multiple notes in amounts as low as $25. You don’t have to be an accredited to get started, and you can begin funding your account with as little as $1,000.
You can read more in the full LendingClub review.
Fundrise is yet another platform that makes it possible for almost anyone to invest in small business. The big caveat here is that each investment offered through the platform is in residential or commercial real estate.
This platform has reported historical returns of 8.7% to 12.4% since its inception, and it allows individual investors to fund large real estate projects that may not have been available to them in the past.
Average investments made through the platform go to fund apartment buildings, commercial real estate, and rental properties.
While you can invest as much as you want using the Fundrise platform, the Starter Portfolio is available with a minimum investment of $500.
Also note that, in addition to its Starter Portfolio, Fundrise offers core investment options that support supplemental income, balanced investing, and long-term growth.
In addition to making it possible for individuals to invest in large real estate projects are traditionally only available to big-time investors and banks, Fundrise offers low fees that make investing affordable.
The company’s eDirect offerings — which include eREITs and eFunds — require a .85% annual asset management fee.
Clients who use the company’s investment services and management system also pay a .15% annual investment advisory fee.
OurCrowd.com was founded in 2013 with the goal of helping individual investors crowdfund unique projects, startups, and innovative business ideas.
This platform offers three different ways to invest in a variety of startups and business ventures, including:
- OurCrowd Portfolio Reserve: A VIP investment account that lets investors start with smaller minimums and receive guaranteed allocations
- OurCrowd Funds: This selection lets you choose funds by theme, stage, or geography
- OurCrowd Startup Select: Invest seamlessly online in pre-vetted startups
OurCrowd.com is only available to accredited investors who meet income and asset requirements set by the Securities and Exchange Commission.
Also note that you’ll pay fees on investments managed through this platform, including management fees, administration fees, and carried interest.
SeedInvest.com is another crowdfunding platform that lets you invest into various tech startups.
Each startup offered on the platform is diligently vetted for quality, which is why only 1% of startups who apply for the platform are accepted each year.
The minimum investment amount is only $500, which makes it easy for almost anyone to get started. You can also diversify your investment across multiple startups from day one.
You do not need to be an accredited investor to use SeedInvest.com, although more investing options may be available to you if you are. SeedInvest.com also charges a 2% nonrefundable processing fee for each investment you make, although the fee will be refunded if the business doesn’t reach its fundraising goal.
WeFunder is another equity crowdfunding platform that lets individual investors support and fund startups within various industries such as technology, food, alcohol, hardware, entertainment, retail, and infrastructure.
While WeFunder can help you make money if you invest wisely, the platform wisely recommends you only invest money you can afford to lose. Start-ups are inherently risky, they say, and many are destined to fail.
Startups that do return a profit for WeFunder investors typically do so in one of four ways — by returning a revenue share, through a simple agreement for future equity, through increased value in the equity you own, and through stock dividends.
In terms of fees, WeFunder adds a 2% service fee to all investments made through the platform.
Investments made with a credit card, on the other hand, require a 3% service fee.
Microventures.com lets individual investors gain access to early and late stage startups and entrepreneurial ventures.
Past investment opportunities have included highly successful companies such as the following:
Current opportunities span industries that include technology, social media, food services, digital marketing, higher education, and more.
Investors who use this platform may be able to invest in small private companies for as little as $100, although minimum investment amounts vary.
Also note that federal law places limits on how much you can invest through this platform depending on your income.
If your annual income or net worth is less than $107,000, for example, you are limited to investing $2,200 or 5% of the lesser of your annual income or net worth during any 12-month period.
Kiva.org is another online platform that lets individuals invest in a variety of small business ideas, except there’s one caveat; Kiva loans are mostly offered in developing countries instead of major markets.
With Kiva.org, you can lend as little as $25 to individuals with business ideas around the world. Kiva doesn’t charge an administration fee for the loans, but they do cover their costs through optional donations.
While Kiva loans report a historical repayment rate of around 97%, there’s no guarantee your loan will be repaid.
Also note that Kiva loans do not collect or distribute any interest charges, meaning you make loans through this platform without any hope of profit above your initial investment.
For the most part, Kiva allows investors to offer loans to individuals who may not be able to get loans for their businesses otherwise. This includes loans that fund agriculture, clean water projects, educational endeavors, and more.
Credibles.co is another online platform that lets you fund certain small businesses in a unique way.
This fundraising concept allows you to prepay for food credits at establishments you patronize with the goal of providing them with working capital in exchange for the future redemption of their products or services.
With Credibles.co, you simply log in to the platform and choose an establishment you want to support.
From there, you will choose an amount you want to prepay the business with and complete your secure transaction online.
To redeem your food credits, you will simply patronize the business and let them know you are paying with your Credibles account instead of regular funds.
This platform provides an opportunity for small businesses to receive capital when they need it instead of when they deliver their product. As an investor, you are able to provide that capital ahead of time by prepaying for food you’ll receive at a later date.
Like Kiva.org, however, this platform doesn’t provide a financial incentive for investors. Instead, it operates with the goal of helping small businesses in your area.
The Bottom Line
Investing in a small business can help you accomplish several different goals, including growing your own bottom line.
You can get involved in equity crowdfunding in order to buy a small percentage of a startup that could change the way we live, invest in small business by prepaying for products or services, or fund small businesses around the world as a charitable effort.
How you invest your money is up to you, whether you decide to support small businesses or invest in the stock market instead.
Make sure you conduct due diligence and ask questions any time you invest your hard-earned dollars. Also, remember that past results never guaranteed future returns.