With the growing Indian economy, there are numerous opportunity where you can invest with little capital. Many young professionals are in search of small investment businesses that can fetch them quick returns. The Prime Minister Narendra Modi has announced the ‘Standup India’ initiative to ensure small business owners that government and financial institutions would offer all possible assistance to them. In addition to this, there are some tax schemes that are designed to favor and to make small investment business more attractive.
In setting up a small investment business, you will have to decide on the mode of business you can establish or you will take over an already existing venture. However, you can look for original ideas to give your business a fresh start.
WHAT IS THE MEANING OF SMALL INVESTMENT BUSINESS?
Small Investment Business is privately owned corporations, sole proprietorships or partnerships with fewer employees and revenue than a normal business corporation. Business investments qualify as small based on their capability to apply for government support and other forms of preferential tax policies.
A small investment company is a privately-owned investment company that is authorized and licensed by the Small Business Administration (SBA). Small businesses get most of their financing in equity and debt through small business companies.
Small investment business is classified in terms of the number of employees, annual revenue, sales, shipments, assets and net profits.
FOUNDATION OF SMALL INVESTMENT BUSINESS
The decision to invest in a small business is based on two choices which is either the position of equity or position of debt. There may be other variations, these two are the foundation for all investments.
SMALL INVESTMENT BUSINESS IN EQUITY
Equity investment in small business is when you buy an ownership stake. If you are investing in equity, you are providing capital, mostly in the form of cash in return for profits or losses. This cash can be used by the business to run daily operations, fund capital expenditures, reduce debt, hire new employees and much more.
In many instances, the proceeds from the business received by the investor are proportional to the capital invested.
Equity investment in a small business usually results in huge gains, but can also bring losses. The risk is often very high if expenses are more than sales; the losses will be credited to you. If things work well, you will get good returns.
SMALL INVESTMENT BUSINESS IN DEBT
Small investment business in debt involves offering money in the form of a loan to a business in exchange interest and refund of the capital. Investment in debts can be provided through direct loans or by purchasing bonds offered by small businesses.
Investment in debt has the advantage of being placed in the capitalization structure. This implies that if the company goes bankrupt, the creditors will be given first place compared to the equity investors.
It could take time and effort before you can recover your debt from a business that has gone bankrupt which in many instances involves proceeds from sales of the underlying property you ceased.
You may decide to invest in debentures, which is the lowest form of debts but are not secured by the company’s asset; it is rather secured by the company’s profile and credit.
HOW TO CREATE A BUSINESS PLAN?
Once the form of business operation has been decided, the next thing is to create a working business plan. A good business plan helps in proper evaluation of the company that is to be implemented. Lenders and investors will also be interested in reading your plan before parting with their funds.
In a self-financed business, you will have to make plans that will display your financial projections and a proper business strategy. The business plan will contain your marketing strategy and the methods you will take to advertise or promote your product and services.
The goals of your business are contained in the business plan and is a major requirement in the review of your performance in the future. The capital that will be needed to run the business must be included in the plan.
WHERE TO OBTAIN FUNDS TO FINANCE YOUR SMALL INVESTMENT
On the successful completion of your business plan, the next step is where and how to get the capital that will finance your investment. Many of the small investment businesses get their start-up grants from family, personal savings, investors and bank loans.
There are considerations to make before choosing the source of capital. Note that investors and family who has donated money for your business will certainly seek a level of control and ownership in the business.
If you have opted for a bank loan, note that a percentage of your profit will be used to service such loans which will reduce your overall gains in the business.
LEGAL CONSIDERATIONS IN SMALL INVESTMENT BUSINESS
Once you have completed the basic requirements which include business plan and finance, you will have to consider the legal framework of the establishment. Small businesses are classed legally as a sole proprietorship, partnership, and corporation.
The legal structure you take will determine the financing decisions of the business. Once you successfully decide on the legal structure of the business, you can proceed with an application for registration and obtain the papers for incorporation.
GETTING AN OFFICE SPACE
You will have to decide the operating place for your business whether it will be based in your home or commercial office. Your decision will be based on the product and services you offer. This will take you to the next decision of seeking an assistance; from there you will know the number of employees to get and the different assignment they will undertake in the company.
Understanding the taxes, you will have to pay is very essential in setting up a small business investment.
NEED FOR MACHINES AND EQUIPMENT
In India, procurement of equipment and machinery can be made through the Small and Medium Enterprise Development Institute. The main aim of this corporation is to ensure that small equipment and machinery are offered to small investment business at a moderate interest rate and a prolonged repayment window.
It is common to see small business lacking the capital funds to purchase equipment in India. However, the Government of India had stepped in by inaugurating several strategies to assisting small investment businesses.
In this regard, a smaller business will be able to procure equipment and vehicles without having to make full payment. The payment will be made by installment until you gain complete ownership of the equipment and machinery.
REQUIREMENTS IN PURCHASE AGREEMENT
The first thing you will do in India is to apply through the prescribed forms. The application will be forwarded to the district’s director of NSIC who will appendage his signature and recommends your application to the authorities at the headquarter.
This application will then be reviewed by the acceptance committee which includes officials that stand in for the Chief Controller of Imports, Development Commissioner, and related offices.
The decision taken by this committee will be sent to the applicant and if the application is rejected, the applicant can approach a higher committee for a possible review.
The committee will inform the supplier to send in the consignment when all necessary formalities must have been concluded.
If the goods will have to be imported, the procedures will take another shape were the shipping papers will have to be cleared by the customs officials before the consignment is taken to the applicant.
ESSENTIALS OF SMALL INVESTING BUSINESS
The most important consideration that any small business investor must make is where to focus on. This is what makes one business unique from another. Before investing in small business there are things you will look out for in the company. These things are mostly necessary for consumer and retail businesses. These are:
Gross Margin: this is the percentage difference between the cost of producing an item and its actual selling price in the market after the production. This is very important because it determines how the company will invest in areas like marketing and distribution.
Gross margin may not be the same for all industry. Focusing on categories with higher gross margin is essential in equity investment. it is usually very difficult for gross margin to increase but focusing on new products with better margins is rather a necessity.
Brand Strength: it is always difficult to assess the brand strength for small businesses, but you can ask yourself if a brand has something unique to offer. A small business that is into the production of eco-friendly wraps for goods bought in the grocery stores is worth investing. This is a brand that is trending, it has the potential to take over the market and will eventually bring satisfying dividends.
CEO: the leadership of the company you are investing in is very important. You must invest behind a CEO you know will be able to handle the business hurdles and bring commendable results. Ensure to conduct necessary reference and background checks on the CEO. The best formula you will use in evaluating the leadership quality of the CEO is to ask questions. You can ask questions like “how is his attitude to employees”, “how does he spend money”; the answers to your questions will give your insight on who is the CEO.
Exit Prospects: companies you invest in may not be in the hand of the owner all the time. The owner may have plans of selling the business to a targeted buyer. In such a case, identify who the potential buyer(s) is and ask to know the necessary acquisition strategy. Knowledge of why the business should attract such a buyer should be your concern before investing. Let your decision be guided by these facts.
Recurring revenue: this is the portion of the revenue that will remain stable into the future. It provides the base for the growth of the business. The management will rely on this revenue while seeking ways to increase the value of the business and possibly the proceeds. This is important because management will do everything within its grasp to maintain old customers to keep the portion of the company’s recurring revenue.
When a consumer likes a product or packaging, he will buy it again and if the product’s value is sustained or improved, the consumer will appreciate it more and the recurring revenue will be maintained.
Get these facts and get it right, with this you will make better informed Small Investment Business decision.