Definition
Equity is the value of an asset that you own outright, after subtracting what is owed against it. In property, equity is the property's value minus all mortgages and loans secured on it. In a business, equity is broadly assets minus liabilities. Lenders look at property equity when deciding how much they can lend against it, and at business equity as a sign of financial strength.
Equity comes up in two different conversations about business finance, and it helps to keep them separate.
Property equity
When a property secures a loan, equity is the cushion between what the property is worth and what is owed against it. A property worth $800,000 with $300,000 owing has $500,000 of equity (illustrative figures). Lenders will not lend against all of it. They apply a maximum loan-to-value ratio, so the equity you can actually use is lower. Our LVR and equity calculator shows both figures.
Business equity
In accounting terms, equity is the owners’ share: total assets less everything the business owes. Growing equity over time usually means the business is retaining profit. Lenders look at it alongside cash flow when assessing larger loans.
Why it matters
More equity generally means more options and better terms. If you want to know what your equity could support, you can make one enquiry; there is no credit check when you first enquire.
Common questions
What is usable equity?
Usable equity is the amount a lender would lend against a property before reaching its maximum loan-to-value ratio, minus existing debt. It is usually much less than total equity.
Does business equity affect loan approval?
It can. Lenders read the balance sheet to see whether the business has more assets than liabilities, which suggests resilience. Negative equity can be a concern for larger loans.
Sources and further reading