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Equity participation refers to a type of tool utilized by borrowers to increase the likelihood of obtaining loans from prospective lenders. An equity participation increases the probability of getting a loan from financiers due to the fact that an equity participation gives such a lender a stake or equity in the business or project for which the loan is meant. As such, an equity participation means that the person or financial institution providing the loan is not just a distant lender, since the person or entity has a more personal stake in the business.
The reason why some borrowers opt for an equity participation is because it helps them substantially increase their chances of obtaining the desired loan, especially if the business is very viable. For instance, if a startup entrepreneur has a solid premise for a business that is likely to experience appreciable growth, the prospective investor will determine this and then decide to obtain equity in the business as a manner of investment that will yield profits. The investor can make calculated determinations as to the viability of a business for equity participation considerations through several methods.
One of the methods for making determinations regarding the viability of a company by prospective financiers includes the calculation of the net income of the company. The net income is the actual income accruing to the company after deductions for tax and other expenses have been made. Such an analysis will help the lender find out if the business is already performing well and will also allow for projections of the likely behavior of the company in the future.
One of the methods by which a financier can embark on an equity participation in an organization is through the established method of purchasing shares in the company, which may be achieved 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 further injection of funds. Such a desire for the company’s success is intrinsically linked to the level of commitment the financier makes to the company in terms of the percentage of equity purchased. This is opposed to an external financier who may not care if the business succeeds or fails so far as the loan is repaid according to the stated terms.