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Equity Equity refers to a type of tool used by borrowers to increase the probability of obtaining loans from potential lenders. An equity interest increases the likelihood of obtaining a loan from lenders due to the fact that an equity interest gives that lender an interest or interest in the business or project for which the loan is intended. As such, an equity interest means that the person or financial institution making the loan is not just a distant lender, as the person or entity has a more personal stake in the business.
The reason some borrowers go for equity is because it helps them substantially increase their chances of getting the loan they want, especially if the business is very viable. For example, if a new entrepreneur has a strong premise for a business that is likely to experience appreciable growth, the potential investor will determine this and then decide to take stock in the business as a form of investment that will generate profits. The investor can make calculated determinations as to the viability of a business from equity considerations through a variety of methods.
One of the methods for determining the viability of a business by potential lenders includes calculating the net income of the business. Net income is the actual income earned by the business after deductions for taxes and other expenses have been made. This analysis will help the lender find out if the business is already performing well and will also allow projections of the business’s likely performance in the future.
One of the methods by which a funder can embark on an equity stake in an organization is through the established method of purchasing shares in the company, which can be obtained through options. The advantage of this type of business financing is that when the financier is so personally connected to the business, he wants the business to succeed, which may require a larger injection of funds. The desire for success of this company is intrinsically linked to the lender’s level of commitment to the company in terms of percentage of capital acquired. This excludes an outside lender who doesn’t care if the business is successful or not, as long as the loan is paid back on terms.