Equity

Equity in a business finance context has two meanings. First, accounting equity: the residual value of a business after all liabilities are deducted from assets - equivalent to net worth or shareholders' funds. Second, property equity: the portion of a property's value not encumbered by a mortgage or charge - the owner's stake.

For secured lending, equity is a key determinant of how much can be borrowed. A commercial property worth £1,000,000 with a £500,000 mortgage has £500,000 of equity. A lender offering 70% LTV on a first charge refinance could advance up to £700,000, repaying the existing £500,000 and releasing £200,000 in new cash.

For business valuation and investment finance, equity refers to the ownership stake in the business. Equity finance (taking on investors) is an alternative to debt finance (borrowing). Equity investors take a share of ownership; debt lenders take repayment with interest. For most SMEs, debt finance through a broker like Spark Finance is the primary route to capital.

Related terms