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While you might be a great salesperson or you may have had a brilliant idea for a revolutionary new product, an entrepreneur still needs to know about the nuts and bolts of running a business to be successful. When it comes to things like financial literacy, too many business people are lacking. This leads to poor decision-making and all too often, business failure.
So, asking questions like “why is the balance sheet important?” and learning more about financial concepts and how they apply to your business is essential. And it doesn’t have to be difficult. Starting with some simple concepts and slowly expanding your range of knowledge is the best way to keep things organized.
To start, let’s look at the concept of business equity, what it is, and some of the reasons why it’s important for your own business.
What is Business Equity?
Business equity can refer to a number of different things within your business. For one, equity can refer to the ownership structure of your business. For example, if you issue shares and have partners who own a proportion of the business too, then your own share of the company is your equity stake. This provides you with a certain degree of decision-making authority as well as potential profit shares.
As with any other type of equity, business equity boils down to the balance between your assets and your liabilities. It’s the amount of money that you’ve put into your business against any debts that you’ve accrued to purchase it. For example, if you paid $50,000 for a $75,000 business, with the remaining amount paid for with a loan, then your business equity is this $50,000.
Your equity can also increase if the value of the asset goes up. For example, if the property that you purchased for your business becomes more in-demand, then you will see your equity grow.
Business equity usually also includes intangible assets. These might not make it onto our balance sheet in an explicit way, though in some cases these will have a tangible and quantifiable value. Things like your intellectual property or your brand, for example, are all valuable even if coming up with a monetary value for them can be difficult.
Why is Business Equity Important?
Fundamentally, business equity is important because it represents your degree of ownership of your business. However, you can also use this equity to invest in your business. By moving your equity towards better equipment or renovations, for example, you can hopefully improve the viability of your business in the long run.
Essentially, equity can be used to take out a special form of a loan — a business equity loan. This loan is secured using the value of your property itself. It’s important to be fully aware of any type of loan that you take out. While these loans can be effective tools for rapidly expanding your business and gaining access to much-needed funds, you will need to pay them back if you want to keep your business operating.
Learn More About Business Equity
These points have touched on the essentials of what business equity is and what it can do for your business. Before moving forward with a business equity loan, however, it’s important for you to learn more about how these types of financial tools work.
Take some time to research equity loans and how the process works. The flexible nature of these loans is highly useful for many businesses, in fact, they are quite common. However, you don’t want to take on new debt that you don’t fully understand and leave your business open to the risk of loss.