Are you ready to invest in someone else’s business?

You have a little bit of money set aside that you’d like to invest in another person’s business venture. Are you ready for that step?

According to some experts, if you have to ask whether to invest your money (or where to invest it), you probably aren’t ready to take that step at all. While there are different theories about when someone’s really ready to invest, there is a general consensus that you should never try to invest money that you can’t afford to lose. You’re better off banking it.

That being said, here are some rules that you should follow if you do decide to take the plunge:

  • Do your own research. Don’t go looking for advice from your neighbor, an internet guru, your parents or your best friend. This is, after all, your money.
  • Don’t fall for a sales pitch. Due diligence is important. You need to see the business plans involved with your potential investment, and you need to understand what your risks really are. Do you know what it takes for a company in that particular field to prosper? Do you know what could cause it to fail?
  • Know your limits. What happens if the business runs into trouble? Are you willing to pour more money into your investment, or will you walk away, knowing your investment is lost?
  • Make sure you understand the tax consequences of your investment. The structure of your investment, such as whether it is considered a loan, can affect your tax liability and your ability to at least take a tax break if you lose your money.

Investing in someone else’s business — even if it is someone you know — can be a difficult decision. Make sure that you have all the paperwork correct and get some experienced legal advice at the outset.