Investing in a small business is quite different from investing in the stock market, a fund, a startup, or a large corporation. It’s important to remember that investing in small businesses contains risk (as all investing does), but there are also unique benefits, says Andre Alonzo Chambers.
The Revenue Sharing Note
A revenue-sharing note is an agreement between an investor and a business. The business agrees to share a percentage of its future revenue until its investors receive a return on investment. This can be hugely beneficial for small business owners, who may struggle with fluctuations in cash flow throughout the year. It also provides an opportunity for investors to impact their returns to an extent. They can choose to patronize the business in which they’ve invested, increasing revenue and potentially their rate of return. The revenue sharing note will work a bit differently from traditional investments as debt security. The returns are capped, and there is a risk that a business will never generate revenue or not generate enough revenue, to complete the full return.
Working with small business owners
Investing in small business owners can be rewarding but also present unique challenges. Investing locally gives investors the chance to personally get to know the business owner and build a meaningful relationship. Investors may gain an emotional benefit from knowing that they’re supporting a local entrepreneur. There’s something to be said for becoming a “regular” at a local business and knowing the person providing services. However, investors should know that small business owners typically have many on their plates. Whereas traditional investment firms and large corporations have entire teams dedicated to investor relations, small business owners may only have themselves. Small business owners may not be as fast to respond to investor matters as investors may expect due to their business demands.
Understanding small businesses
Small businesses are important aspects of communities. The new regulations allow investors like Andre Chambers Las Vegas to invest in them through funding portals. Small businesses provide a sense of local pride and make neighborhoods vibrant and unique. And while common beliefs such as restaurants fail in the first year” are exaggerated, small businesses carry unique risks and many fails. This is largely due to undercapitalization, which community investment is specifically designed to prevent. Still, the fact remains that many small businesses struggle to generate enough revenue to make it past a couple of years. Small businesses tend to run on tight margins. However, the social underwriting model predicts that community investment mitigates some of the risks of starting a small business. It’s important to remember that all investment is risky, and it encourages all investors to seek outside advice before starting a new investment strategy.