Difference Between Loan And Equity / Capital

Loan VS Equity / Owner's Equity / Capital

Usually, Loan is an example of Long-Term Liability / Non Current Liability, but there are also short-term loans and in that case, these are treated as Current Liabilities. Loans are payable by the business to outsiders while Equity is the rights of owners of the company’s business against the Assets of the business. In case of Sole Proprietorship or Partnership, the word “Capital” is used instead of “Equity”.

A loan is taken from financial institutions like banks, etc., while equity is raised by issuing shares to owners or public in general. In case of Sole Proprietorship or Partnership, the capital is invested by owner or partners to run the business 

A Loan is an external source of finance while equity / capital is an internal source of finance of the business.

There are different types of loans like shot-term loans, long-term loans, secured loans, unsecured loans, etc., while equity includes share capital, share premium, profit / income for the year, retained earnings etc. In case of Sole Proprietorship or Partnership, the additional capital and profit is added to the opening capital.