## Equity: What It Is and Why It’s Important for Small Business Loans
Equity is a term that gets thrown around a lot in the world of business finance. But what exactly does it mean? And why is it so important for small business owners?
Simply put, equity is the value of your business. It’s the difference between what your business is worth and what you owe to creditors.
There are two main types of equity:
* **Owner’s equity:** This is the equity that belongs to the owners of the business. It’s the value of the business after all debts have been paid.
* **Shareholder’s equity:** This is the equity that belongs to the shareholders of the business. It’s the value of the business after all debts and other liabilities have been paid.
Equity is important for small business owners because it:
* **Provides a cushion against financial downturns:** If your business experiences a financial downturn, your equity can help you to weather the storm.
* **Makes it easier to get loans:** Lenders are more likely to approve loans to businesses with strong equity.
* **Increases the value of your business:** Equity is a valuable asset that can help you to increase the value of your business.
### How to Build Equity
There are a number of ways to build equity in your small business. Some of the most common include:
* **Investing in your business:** Investing in your business, such as by purchasing new equipment or hiring additional staff, can help to increase the value of your business.
* **Generating profits:** Generating profits is one of the best ways to build equity in your business. When you make a profit, you are essentially increasing the value of your business.
* **Paying down debt:** Paying down debt can help to increase your equity by reducing the amount of money that you owe to creditors.
### Equity and Small Business Loans
Equity is an important factor that lenders consider when making small business loans. Lenders are more likely to approve loans to businesses with strong equity because it reduces the risk of the loan defaulting.
If you’re thinking about applying for a small business loan, it’s important to understand how equity will affect your application. The more equity you have in your business, the more likely you are to be approved for a loan and the better the terms of the loan will be.
### Conclusion
Equity is an important financial tool for small business owners. It can help you to weather financial downturns, make it easier to get loans, and increase the value of your business. If you’re not sure how to build equity in your business, talk to a financial advisor.
## Frequently Asked Questions
### What is the difference between equity and debt?
Equity is the value of your business after all debts have been paid. Debt is the amount of money that you owe to creditors.
### Why is equity important for small business owners?
Equity is important for small business owners because it:
* Provides a cushion against financial downturns
* Makes it easier to get loans
* Increases the value of your business
### How can I build equity in my small business?
There are a number of ways to build equity in your small business, including:
* Investing in your business
* Generating profits
* Paying down debt
### How does equity affect my small business loan application?
Equity is an important factor that lenders consider when making small business loans. Lenders are more likely to approve loans to businesses with strong equity because it reduces the risk of the loan defaulting.