Equity

2 min read

Assets − LiabilitiesNet equity

Ranks lastRepayment priority

In plain terms

Equity is what's left for the owners once everything the business owes has been settled. Take the total value of the assets, subtract every liability, and the remainder belongs to the shareholders. On the balance sheet it appears as share capital plus retained profits.

It's the opposite end of the funding spectrum from debt. A lender is owed a fixed amount and gets paid first; an equity holder owns a slice of the whole business and gets paid last — but shares in all the growth. That trade-off is the heart of every financing decision.

Equity versus debt

The two ways to fund a business behave very differently:

Feature	Equity	Debt
Repayment	None — capital stays in the business	Repaid on a schedule
Cost	Share of future profit and control	Interest and fees
Priority if things fail	Last	Ahead of equity
Ownership	Diluted	Unaffected

Equity never has to be repaid, but it permanently dilutes your ownership. Debt, such as a short-term business loan, costs interest but leaves you in full control of the company you built.

Why it matters to your business

Your equity cushion is one of the first things a lender looks at. It signals how much of their own money the owners have at stake and how much loss the business could absorb before a lender's position is threatened. A thin or negative equity position makes borrowing harder and more expensive.

Equity also drives gearing — the ratio of debt to equity. A business with strong equity can borrow more comfortably because each pound of debt is backed by a larger ownership stake. Building retained profit over time is the quiet way most companies strengthen their borrowing position.

A worked example

A design agency holds £180,000 of assets — equipment, cash and unpaid receivables — and owes £70,000 in loans and trade creditors. Its equity is £110,000.

When it later draws a £40,000 working-capital facility, equity is unchanged: the new asset (cash) is matched by a new liability (the loan). Equity only moves when the business makes a profit, takes a loss, issues shares or pays a dividend. Understanding that distinction stops directors confusing borrowed cash with owned wealth.

Frequently asked questions

Does taking a loan reduce my equity?

No. Borrowing increases both an asset (cash) and a liability (the loan), so equity is unchanged at the moment you draw down. Equity only changes through profit, loss, new share issues or dividends — though interest costs reduce future profit, and so future equity.

What is negative equity in a company?

Negative equity means a company's liabilities exceed its assets, so the owners' stake is worth less than nothing on paper. It's a warning sign of distress and usually makes raising further finance difficult without restructuring.

Is equity finance better than debt for my business?

Neither is universally better. Equity needs no repayment but dilutes ownership and control; debt keeps you in charge but must be serviced. Many businesses use both — equity for long-term backing, short-term debt for working capital.