Investments are always a game of chance. But an investor always wants to be ahead of the game when it comes to investment choices. Some options include the stock market, real estate and small businesses. With investments in small businesses an analysis of the business must be made to determine if the business meets requirements and potential expectations. When investing in small businesses an investor can have the fortune of reaping great financial gain or lose every cent invested in the business. It is for this reason it is important to look at the potential for gain as well as risk in small business investments.

There are two different types of investments that can be made in small businesses. They are equity or debt investments. When an equity investment is made an individual buys a portion of the ownership of the business. Investors in this scenario provide capital usually in the form of cash in exchange for a percent of both profits and losses. Equity investments can provide the biggest gains and risks for an investor. If the business is extremely profitable the equity investor reaps the monetary rewards. However if the business has losses they are given to the equity investor to absorb.

The second type of investment for small businesses is debt investment. An investor loans money to a small business with the promise of repayment plus interest. The money invested is in the form of direct loans or bonds purchased by the business. The advantage of debt investment over equity investment is if the company enters bankruptcy the debt investors have priority over equity investors to secure their original investment minimizing risk.

To help ensure gain there are some things to consider when investing in a small business. It is important to know how long a company has been in business to show stability. The amount of experience the management has in the industry and prior success at previous companies are also good indicators if management has the ability to meet the needs and growth of the business. As with all ventures it takes money to make money. A company must have enough money and resources to function successfully. Finally an investor must be informed about the industry they want to invest. Without proper information and knowledge an investor will not be able to properly allocate their resources to maximize gain and minimize risk.