How To Diversify Your Portfolio Through Small Business Funding

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Why should you diversify your portfolio?

Ever heard the saying ‘don’t put all your eggs in one basket’. Well just like it applies to every-day life, it can also be applied to investing. Diversifying your portfolio may be a great idea for investors to hedge against the unsystematic risk of the portfolio you are investing in because different asset classes perform differently at different times.

Ways to diversify your portfolio

While investors can diversify their portfolio by investing in diverse ranges of publicly traded securities, this article might help you consider diversifying your portfolio by acquiring private equity in small to medium sized businesses or providing financing for small to medium sized businesses.

  • Private-Equity Investing

Private-Equity investing can be one of the primary ways to acquire an interest in a small private business. As an equity investor, you own a certain percentage of a small business, just as if you bought a stock on the stock exchange.

Holding shares as a majority or minority investor, in a small to medium sized business, can still allow you to enjoy the profits of the business. The profits you do receive are likely distributed according to the percentage of shares you own in that business.

Why consider this?

You may be surprised to know that in the past, small to medium sized businesses have grown at a faster rate than some of the publicly listed companies. Holding private shares of a small business can offer significant returns when the company decides to go public, however this is not guaranteed.

Another possible benefit is that shareholders are liable only to the extent of any unpaid amounts on their shares if called to do so.

  • Fixed Income Investment

Investors provide financing to a company with the anticipation that its future cash flows will provide the investor a return in interest and/or principal invested after a specified period.

Why consider this?

It can be argued that fixed income investing poses lower risks to equity investors. This is mainly because in the event the small business enters financial distress, priority may be given to debtholders rather than equity holders.

Getting Started

Unfortunately, fixed income investments might not always be so accessible, therefore it could be a good idea to consider investing through businesses such as Marketlend. Through its platform, Marketlend connects wholesale and sophisticated investors to fixed income investments in small to medium-sized businesses. Investors may hedge the risk of downturns in the equity markets by earning returns by investing through this platform.

Before investing in a small to medium-sized business, do your due diligence and seek relevant professional advice, just as you would with any other investment. You can read our article about the benefits and drawbacks of hiring a Financial Advisor to help you make better investment decisions.

2 December 2022