What is Source of Equity?
The Short Answer
Source of Equity explained simply
When you buy a business, you need money. The "Source of Equity" is simply where that money comes from. It's the cash you put in yourself, or that others put in with you, to own a piece of the business. This is different from debt, which is money you borrow and have to pay back.
Real-World Example
Buying a Coffee Shop
Let's say you want to buy a coffee shop for $200,000. You have $50,000 in your savings. Your friend invests another $50,000. You get a bank loan for the remaining $100,000. Your "Source of Equity" is your $50,000 and your friend's $50,000, totaling $100,000. The bank loan is debt, not equity.
Why this matters
Knowing your source of equity is key because it shows how much ownership you have and how much risk you're taking. It also tells lenders and sellers how serious you are and how financially stable your offer is. Strong equity shows you have skin in the game.
Always be clear about where your equity is coming from. Lenders and sellers want to see a solid financial foundation, not just promises.
Always be clear about where your equity is coming from. Lenders and sellers want to see a solid financial foundation, not just promises.
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