Who does not like a stable cash flow coming in every month from the couple of small businesses you have invested in?

With today’s economy being in the condition that it is, working a full-time job is not enough – especially if you are trying to raise a family.

A steady stream of extra income – no matter how small – is welcomed by every American household. Therefore, the trend to have side businesses while pursuing your primary profession has escalated remarkably in recent years.

However, unless you are a pro in the investing field, it is a considerable challenge to find, or think of on your own, some good business ideas that carry weight. It is not every day that you will be approached with an opportunity that could be truly worthwhile.

Not Thinking Your Move Through Can Result in a Tremendous Financial Loss

What you need to know before investing in your startup idea

As a result, when an American is presented with such an exciting chance, he will consider it an opportunity of a lifetime. Most amateur investors will be so carried away by the brilliant idea that they will jump on it without considering all the essential factors that a pro would consider.

Though it is undeniably very tempting to grab the opportunity by both hands as soon as it comes to your notice, the smart thing to do would be to take a step back, analyze all the outcomes of your investment, and then carefully plan your next move.

Doing this does not only make it less likely to lose your money to a business idea that might not be as big of a hit as you expect it to be, but it can also provide you with valuable information of what you should be taking care of when starting or trying to improve your own business.

In the following paragraphs, we will discuss the most important things you need to be aware of before you go about investing in a startup – whether the idea is your own, or somebody else’s.

1# The exact amount you can spare to invest

The first thing that you need to know before investing is the amount of money you can comfortably take out without compromising your current living conditions and lifestyle.

When you are investing money into a business, it is but to realize that you cannot have this money back whenever you want. It is only after the pre-decided time has passed that you will be eligible to receive your share of the profits the business has generated.

This means that should you be hit with a financial emergency during this time, your investment most probably has not got your back. This is why checking account minimum balance is required by your saving’s account in the bank and set aside some funds for a rainy day is so essential before giving your money to a business.

2# The reason why they are looking for funds from investors

This comes to the case when the idea that you are considering to invest in is not your own. When you are approached with an opportunity to invest in a business, you must always ask yourself – why did they not go to a bank?

Taking loans from a bank is comparatively more straightforward than asking amateur investors around you to fund your startup. Most aspiring business owners will only do it once the bank has rejected their request for investing in their endeavor.

When banks do this, they always have a good reason for it. While sometimes the reason is small and insignificant to you, other times it can say a lot about the prospects of that business in the future. Hence, you must always keep your eye open and try to unearth the reason why they have come to you for funds after approaching a bank.

3# The ins and outs of the industry you are investing in

Knowing the industry, before jumping into the business plan is something that a lot of people think is not as important as investment advisors, will make it out to be.

As long as you are a third party investor and are not directly managing the business, you can rely on the knowledge of your partners who are, right?

Wrong! Whether you are directly involved in the management or are simply a silent financial contributor, knowing the ins and outs of the industry is equally vital for every partner.

It is only when you have done enough research that you can make an educated decision on whether investing in this business is the right move or not.

90% of all new startups today are destined to fail, and not having enough knowledge of the industry is one of the biggest reasons for their collapse. Therefore, rather than looking for ways to overcome your business crisis, a wiser approach would be to research the workings of the relevant industry before you start.

Relying on other’s knowledge and judgment and putting your hard-earned money on the line is not something that you would want to do, no matter how educated the other partners are in the matters of the business.

4# The content of any legal documents that will be written up

Last but not least, you must know the content of each legal document that will be drawn up in full. This is a no brainer, but many people often disregard reading through every line of the legal documents that are written up – primarily when they are investing into the startup the idea of a friend or a family member.

If you were about to sign a legal document without going through it extensively – or better yet, showing it to your lawyer – then you need to rectify this mistake at once! What might escape your inexperienced eyes will be caught by the prudent eyes of a professional lawyer who has been dealing with these things all his professional life.

Hence, no matter how close you are to the person starting the business, we not only recommend you to read the fine print but also gear up with an attorney who could look out for you and advise you on these financial matters.

The Final Word

Have you been considering to invest in a business or two? Does your friend from yoga class have a brilliant business idea about homemade smoothies and wants to start it with you? If yes, then you better consider the above factors before saying yes to her!

If we have missed an essential element in this list, comment down below and let us know. We would love to know your insights into investing in startups!

Author Bio: Evie harrison is a blogger by choice.  She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. Find her on Twitter:@iamevieharrison

About the author

From time to time, we feature outside authors on fincyte and publish their informative guest posts online. This is one of those selected guest posts. Further, opinions expressed by Fincyte contributors are their own.

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