Small businesses have historically been the force that pulls our country out of tough economic times. Their ability to work more efficiently allows them to find innovative ways that spur job creation. But, without being able to find available capital, small businesses are restrained.
A full recovery will not take hold until small businesses have access to adequate capital. The mega-businesses have been propped up by the government, but small businesses heavily rely on the private-capital investments that are currently lacking.
Investing in small businesses has many advantages. From a business stance, while larger corporations have strayed from their original initiatives, small businesses usually have focused business plans that detail their near-future commitments. Yet, small businesses still tend to be more flexible, which is a huge advantage considering the amount of ideas that small businesses produce.
Without flexibility and the willingness to take educated risks, their ideas would have no petri dish in which to grow. Another advantage is that small businesses usually carry less debt than large corporations; which use debt as a primary ingredient in their financial engineering. Less debt equals fewer obligations, and this can translate into quicker returns for investors.
No matter how simple or complex a small-business investment appears, it is important to always keep in mind a few basics.
First, invest in small businesses that have solid business models that you believe in. Just because a company has filed with the state to sell its securities does not mean that the investment will be a success.
Businesses succeed because of vision and follow-through. Remember that "publicly traded" does not necessarily mean "better."
Second, do not let an employee of a company convince you that an investment is not risky, that is a lie. Companies will often have securities salespeople who work on a commission. This does not mean they are automatically corrupt, it just means do not let their promises replace your due diligence.
Plus, investments always carry some level of risk. Which brings me to my last point: Always carry through with proper risk analysis. There are registered investment advisers, lawyers and other financial professionals that can help take the headache out of the process. Do not pinch pennies early on in the investment process only to be burned later by a flaw that a professional could have identified and corrected.
These are terrific times for investing in small businesses. There are countless opportunities to invest your capital in quality projects that will produce high returns.
With credit not rushing like it did before the bust, business owners are actively searching for ways to acquire capital. Our recovery will continue to look and feel like a false hope until small businesses have the means to expand, create jobs and put people back to work.
• Thomas J. Powell of Reno is chief executive officer at ELP Capital and chief investment officer for ELP Capital Advisors.