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Are Small Businesses A Smart Investment Right Now?

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10-03-2008

October 2, 2008

By Kelly Spors

With the stock and housing markets in dire straits, some investors are placing their bets in what they now consider a safer arena: small businesses.

My colleague Raymund Flandez and I today wrote about how many small businesses are having trouble getting traditional bank financing and are seeking out alternatives. One such alternative: angel investors, or wealthy individuals looking to invest money in growing businesses.
Such investors are being more selective right now given the economic turmoil on Wall Street. But they seem to be more willing to invest in promising small companies now that other investment options look so bleak.

“A lot of people don’t have faith that the stock market is going to improve in the next two or three years,” says Zameer Upadhya, chief executive and co-founder of BabySpot.com, a new social-networking site for new parents. Just last week, another entrepreneur whom Mr. Upadhya had met seven years ago through the Association of Latino Professionals in Finance and Accounting agreed to invest in his business.

I heard similar sentiments recently when I interviewed Hugh Bromma, chief executive of Entrust Group, which offers self-directed individual retirement accounts that let account holders invest their money in nontraditional retirement-fund assets such as real estate or private businesses. Entrust has seen a 23% increase since 2007 in the portion of its portfolio being invested in limited liability corporations, which tend to be small businesses.

Among common businesses funded by retirement funds: small banks and restaurants. The big shift toward investments in LLCs is the biggest one-year shift Entrust has seen “in many years,” Mr. Bromma says.

IRA holders can’t use their own retirement funds to invest in their own businesses, since that would break federal “self-dealing” restrictions. But it’s fine for them to invest in other people’s businesses. Many of Entrust’s clients are finding businesses in their communities or through investment clubs and funding those businesses, Mr. Bromma adds.

Readers, are small businesses or start-ups with growth potential a better bet than the stock market right now? Or are there major risks?