Investors commit their money for basic reasons: to make a profit, to shelter tax liability and to participate in an interesting project that might add social value. Investors in a small or startup company are looking for the same things. The better the chance the company will be a financial success, the more likely it is to receive investor money. But other influences, such as the economy and investment trends, also explain why investors are attracted to a business investment.
LOW interest rate
The state of the economy creates motivation for investment in businesses. The Federal Reserve lowers interest rates to encourage economic activity. When bonds are paying a low rate of interest, investors who might ordinarily have invested in bonds tend to seek higher returns in alternative investments. Many of those investors turn to investing in small or startup businesses. A period of low interest rates favors businesses by presenting low bank borrowing costs as well as an opportunity to solicit private investment. A small company seeking funding can take advantage of periods of low interest rates by offering private investors attractive rates of return on loans or dividend payments.
PROFITS
Another motivation for business investment is the potential for profit. Dividends, combined with capital appreciation as the company flourishes, are tempting reasons for a private investor to invest in a small business. Attracting business investment involves motivating private investors by focusing on the potential profitability of the business and the likelihood of attractive returns on an investment. Profitability is judged by its sustainability over time and the likelihood of exponential growth in the company's target market. Investors are motivated by the potential for quick profits, but they also want to see that a company can expand its product line and revenue streams for enhanced future returns.
IMPACT
Impact investors seek simple, inexpensive ways to jump-start sustainable commerce that results in broad creation of wealth in a population. Underdeveloped countries are the main focus of impact investors, who provide educational, agricultural and business resources that will eventually create enough wealth among poor populations to turn people into consumers. These investors forgo immediate profit for exponential returns produced by a growing marketplace. As the living conditions in the target population improve, people can consume more goods and services. This results in attractive returns on investment over time and a foothold for investors in future commercial development.
OTHER CONSIDERATIONS
When an investor considers his income tax liability, another motivation is the prospect of tax deductions that might come with investing in a startup or small business. The value of these deductions changes as the government institutes programs designed to motivate business investment, and they depend on the legal structure of the investment. Other motivations to investment are special deals offered by companies, such as a specific number of free dinners offered by a restaurant to its investors or the ability to buy a new car at cost, which might be a benefit offered by a car dealership to its investors.