The primary reason why we do business is to make a profit. Before choosing where to invest your hard-earned cash, you must do a background check on the business you are interested in. If the company you invest in fails, it is more likely that you lose some or all of your investment. A company is a risk, and any business’s outcome is uncertain, especially at the beginning. Understanding the risks that come with investing in businesses helps you a long way to make investment decisions. Some of these risks include:
- That the company is going to fail and you lose all your investment
- That the company does well but takes a long time to start receiving dividends for your shares
- That the percentage of the equity shares you hold in the business reduces as the company grows
Red flags an investor needs to look out for before investing in any business
1. Too much or too little capital
How much are the founders asking from you for the investment? If it is too small, be careful.
Maybe they need to pull a lot of investors into their already weak business. If the deal is too good, think twice. If they ask for too much, maybe they are in a lot of debt and want to use your funds to redeem their business. As an investor, think critically and analyze what capital the company is asking to ensure that you do not lose.
2. Who are the founders of the business?
Before you make any investment, you need to know precisely who are the founders of the business. Do they rely entirely on the company as their source of income, or is the business a part-time hustle? Somebody who depends entirely on the industry will most probably take the business seriously than another income source. Knowing this will assist you to know if the company is worth your investment or not. Knowing who is in the industry will also help you keep illegal practices. For more information, read about insider trading Martha Stewart.
3. Wrong use of funds
If you notice that the business does not use funds correctly or have misplaced priorities, run. There is no point in investing in a company that will not use funds correctly in one way or another. For example, if you notice that a business purely relies on paid advertisements, there is a big problem. Today there are so many forms of unpaid advertisements that allow businesses to cut down on costs. Therefore, a company that uses paid advertisements poses the risk of operating funds in the wrong way.
4. A large number of the founders
It is not advisable to invest in a business with so many members in the founding team. Remember, the many they are, the more the company will part within their salaries and remunerations. Having a vast number of founders is not a guarantee of business success. It is easier for a small number to agree on the way forward than when many people handle the decision-making process.
5. Poor credit ratings
If a business has a low credit rating, it has no responsibility for its finances, especially borrowings. Why would you want to invest in a company that will not qualify for a loan even when a problem arose? Good credit ratings are one of the assurances a business gives you that they have everything under control. Would you be willing to invest in a country whose credit status has been rated negative?
6. A poor marketing strategy
Every business has competition from other companies dealing with the same products or services. If the firm does not have a good marketing plan, they stand no chance of gaining a competitive advantage over their competitors. Every investor shouldn’t get into a business that will not make sales. Remember, the more sales the company makes, the higher chance you will get returns from your investment.
If something is not adding up about the business, hold your horses. Don’t make your investment so soon and later on have regrets. Understand all the basics for investment. Take your time to analyze the business bit by bit to ensure that it is genuine and you will not lose money. As much as there are real investment opportunities all over the globe, there are also many scammers. Ensure that you pick a business that will be rewarding and will consider your interest as an investor.
