We are a private investment firm and looked at funding small businesses. However, the main problem we found was that the level and cost of doing due diligence on a small business was not worth it, when you considered what kind of upside we would achieve.
If you are only investing up to $1 million in an investment, and it costs you (or the business owner) $50k to assess the investment, you would need a fairly tidy return to make it worthwhile, which in most cases is simply unrealistic.
The only way to make a small private investment is if you have intimate knowledge of that particular business and industry already (which backs up what is being said above).
We use a form of finance for small businesses known as factoring, it works out cheaper for the business and allows us to make small investments in small businesses without the need for heavy due diligence. Unfortunately it doesn’t work for all businesses, but when it does, it does.