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Equity participation increases the likelihood of obtaining loans from lenders by giving them an equity interest in the business or project. Calculating net income helps determine viability, and purchasing shares establishes a personal connection to the business, increasing the desire for its success.
Equity participation refers to a type of tool used by borrowers to increase the likelihood of obtaining loans from potential lenders. An equity interest increases the likelihood of obtaining a loan from financiers due to the fact that an equity interest gives said lender an interest or equity in the business or project for which the loan is intended. As such, an equity stake means that the person or financial institution providing 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 opt for an equity interest is because it helps them substantially increase their chances of getting the desired loan, especially if the business is highly viable. For example, if an enterprising entrepreneur has a strong premise for a business that is likely to experience appreciable growth, the prospective investor will determine this and then decide to raise capital in the business as a form of investment that will generate profit. The investor can make calculated determinations as to the viability of a business for equity considerations through various methods.
One of the methods for making determinations regarding the viability of a business by prospective financiers includes calculating the net income of the business. Net income is the company’s actual income after deductions for taxes and other expenses have been made. Such an analysis will help the lender discover whether the business is already doing well and will also allow projections of the company’s likely behavior in the future.
One of the methods by which a financier can embark on an equity stake in an organization is through the established method of purchasing shares in the company, which can be accomplished through options. The benefit of this type of business financing is that when the financier is so personally connected to the business, he or she will want the company to succeed, which may require a larger injection of funds. Such desire for the success of the company is intrinsically related to the level of commitment that the financier makes to the company in terms of the percentage of capital acquired. This is opposed to an outside financier who may not care if the business succeeds or fails as long as the loan is repaid according to stated terms.
Smart Asset.
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