As a small business owner, you could be sitting on significant equity in your business. Here’s what you need to know about small business equity and how you can use it to secure the financing you need to grow.
What is equity?
Equity is the difference between what you own (your assets) and what you owe (your liabilities). It grows as the value of your assets increases or your liabilities decrease. For example, if you purchase business premises for $400,000 with a down payment of $80,000 and a $320,000 bank loan, your equity will be $80,000.
So, depending on your repayments and the stability of the real estate market, your equity may increase or decrease over time. However, equity isn’t just about your commercial property. Machinery and equipment you purchase for your business as well as revenue growth may also contribute to the value of your business, and therefore the equity.
How can I use equity?
Many small businesses look to borrow against equity when they are entering a growth phase or are looking to invest in additional assets. That could include anything from upgrading your business premises and bringing on more staff, to funding a new product line or even buying out a competing or complementary company.
How can I access it?
There are a few different ways you can use the equity in your business to secure extra finance:
- Take out a business equity loan: Some lenders will allow you to borrow money against the equity you have on your business premises or commercial property. Be aware, though, that failing to make your repayments may result in losing those assets to the lender.
- Sell shares to a partner: You can sell a portion of the equity you own in your small business to a new partner or partners. However, depending on the terms of the partnership agreement, you may need to give up some control of your business.
- Sell shares to private investors: You can also sell the equity you own to private investors as shares. However, while this will generate short-term funds, keep in mind that your investors will likely receive a percentage of your future profits. They may also ask for a say in your business operations.
It’s important to understand how much equity you have in your small business and how to put it to work for you. Equity can help you secure the funds you need to grow your business, and gives you the capability to quickly invest in new opportunities as they arise.