Sweat equity is human contribution to a business.
Sweat equity refers to the efforts of executives or other shareholders into a company. This does not include money that is put into a business, which is financial equity. It is the time and knowledge that an individual or a group of individuals put into a business to make a result.
Sometimes a business can use sweat equity to cut start-up costs. You can offer shares of business stock to business service providers instead of money. This action is most often referred to as "equity compensation". The service providers benefit because they obtain shares into the company. However, it can difficult to finance a business in this way because most service providers want their money up front.
Sweat equity is best understood in the real estate sense. If you complete a repair on your home, or if you personally add on a deck you would be improving the value of your home. You increased your home’s value by putting in your own efforts. It works the same way for a business.
At some point your business will need regular financial capital, and it can’t grow solely dependent on sweat equity. Make sure that you have established solid business credit scores so you can actively go after the right funding for your business. Our Business Finance Coach will teach you how to setup your business so you have everything in place that lenders want before you go after your loan.
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