Estimated reading time: 8 minutes
Americans might have mixed feelings about Wall Street, but it’s safe to say we love Main Street.
In fact, 86% of U.S. adults say small businesses have a positive impact on the country — making them the most trusted institution in America.
Small businesses are a quiet powerhouse in the U.S. economy, employing over 56 million workers and generating $16.2 trillion in revenue. They’re also responsible for the majority of job growth. But if you’re looking to invest in these businesses, you won’t find them on the S&P 500 — you’ll need to explore the private markets.
Investing in small businesses offers a unique opportunity to tap into high-growth potential, diversify your portfolio, and make a positive community impact. Unlike large corporations, small businesses can experience rapid early-stage growth, delivering significant financial returns while driving innovation and job creation in local communities.
In this guide, we’ll cover everything you need to know about investing in small businesses — from the types of investments available, how to find opportunities, and the potential pros and cons of investing in mom-and-pop shops in 2025.
First, let’s explore the three primary types of small business investments: equity, debt, and hybrid investments.
An equity investment involves buying a stake in a small business in exchange for ownership shares. As an equity investor, you share in the business’s success (or failure) based on its performance and growth.
Common examples of equity investments include:
A debt investment involves lending money to a business in exchange for regular interest payments. Unlike equity investments, you do not own a portion of the business. Instead, you’re acting as a lender with a promise to be repaid according to the agreed terms.
Common examples of debt investments include:
Hybrid investments combine features of both equity and debt. These options offer greater flexibility and different risk-reward profiles depending on the terms of the agreement.
Examples of hybrid small business investments include:
Here are four key avenues to find small business investment opportunities:
One of the easiest and most reliable ways to find small business investment opportunities is through your personal network. Friends, family, and local business owners can be excellent sources of opportunities, particularly if you already have relationships built on trust.
Small business owners often seek funding from people they know before turning to formal investors. If you’re interested in supporting a local business or helping someone you trust get their venture off the ground, your personal network is a great starting point.
The rise of online crowdfunding and peer-to-peer lending platforms has made it easier than ever to invest in small businesses. These platforms connect entrepreneurs with investors, allowing you to browse a wide range of business opportunities from the comfort of your home.
Some platforms offer equity investments, while others focus on lending opportunities. Many of these platforms provide detailed business information, financial projections, and even investor perks.
If you prefer a more hands-on approach, consider attending local business events to connect with small business owners and entrepreneurs directly. Small business associations, Chamber of Commerce events, and local meetups are excellent venues for finding businesses seeking investors.
These events allow you to build relationships with local entrepreneurs, gain firsthand insight into their operations, and learn about their funding needs.
If you’re looking for structured investment opportunities, consider joining an angel investor group. These organizations connect high-net-worth individuals with small businesses seeking funding. Angel groups often focus on early-stage businesses and startups with high growth potential.
Angel investor groups provide members with access to curated investment opportunities, due diligence reports, and educational resources to help them make informed decisions.
No matter where you start, always conduct thorough due diligence to ensure the business aligns with your investment strategy and risk tolerance.
While small business investments offer exciting opportunities for growth and impact, they come with unique challenges that every investor should understand before committing funds.
One of the biggest appeals of investing in small businesses is the potential for high returns. Unlike established corporations, small businesses often experience rapid growth in their early stages, which can translate into significant financial gains for investors. For example, a small startup you invest in today could grow into a major industry player, multiplying your initial investment several times over.
While not every investment will achieve these results, those that succeed may deliver returns far exceeding traditional investments like stocks or bonds.
Investing in small businesses allows you to diversify your portfolio beyond traditional asset classes, such as stocks, bonds, and real estate. This diversification can reduce your overall risk by spreading your investments across different sectors and industries.
Small business investments are also less correlated to the stock market, meaning they may perform better during times of market volatility. By including alternative assets like small businesses in your portfolio, you can create a more resilient investment strategy that isn’t solely dependent on public markets.
Small business investing isn’t just about potential profits — it’s also an opportunity to make a positive impact on local communities. By funding small businesses, you’re supporting entrepreneurship, job creation, and innovation.
Many investors find fulfillment in knowing their capital is helping a business grow, creating jobs, and contributing to economic development. This type of impact investing is becoming increasingly popular, especially among investors looking to align their financial goals with their values.
While the potential for high returns and meaningful impact is significant, it’s important to fully understand the risks involved as well.
The biggest risk of small business investing is business failure. According to the U.S. Small Business Administration (SBA), over 30% of small businesses fail within the first two years, and 50% fail within five years.
Unlike investing in established companies with proven track records, small businesses often operate in uncertain markets or rely heavily on new products and services. This risk of failure means investors must be prepared to lose their entire investment if the business doesn’t succeed.
Small business investments are typically illiquid, meaning they cannot be easily sold or converted into cash. Unlike publicly traded stocks, there’s no open market to sell your shares in a small business, and you may need to hold your investment for several years before seeing any returns.
This lack of liquidity can be a challenge for investors who need quick access to cash or prefer more flexible investments. It’s important to approach small business investing with a long-term mindset and ensure you won’t need those funds in the near future.
Small business investments often have a long time horizon before generating returns. It can take years for a business to achieve profitability, and investors need to be patient during that time.
This long wait for returns can be frustrating, especially for those used to more immediate results from traditional investments. However, for those willing to take a patient, long-term approach, the rewards can be well worth the wait.
Investing in small businesses can be a powerful way to diversify your portfolio and achieve long-term growth.
With a self-directed IRA (SDIRA), you can take this a step further by using your retirement funds to invest in privately held companies while enjoying tax advantages that come with a traditional or Roth IRA.
Unlike an IRA held at a bank or brokerage that limits investment options to public securities, an SDIRA gives you the freedom to invest in private companies, startups, partnerships, and more — as long as the investment complies with IRS rules.
Here’s how the process works:
That’s all there is to it.
Plus, if you become an Entrust client, you gain exclusive access to Entrust Connect, our online investment marketplace that’s constantly updated with new small business opportunities from real estate projects to burgeoning startups.
Want to learn more about SDIRAs? Download our free SDIRA Basics Guide. Inside, you’ll find a comprehensive breakdown of the IRS rules, examples of what you can and cannot invest in, and a step-by-step process to get started.
Note: The content provided here is for informational purposes only and should not be considered financial, tax, or investment advice. Always consult with a trusted tax or financial advisor to determine what is best for your unique situation.