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www.IndependentRetailer.com FINANCE Biz Credit & Home Values
MANY SMALL business owners fi nance their companies by borrow- ing money personally and putting the proceeds of their loans into their businesses, or by pledging personal assets as collateral to obtain busi- ness loans. Yet because the biggest asset most people have is their homes, this means that a sizable chunk of small business owners rely on home equity to fi nance their companies. With that in mind, did small business owners’ borrowing against their homes during the real estate boom sow the seeds of their current problems getting credit? A survey of about 1,000 small busi- ness owners, conducted by Barlow Research in 2007, shows that one quarter either used their homes as
collateral for business loans or took personal loans against the equity in their homes to fi nance a small business. Moreover, during the pre- recession part of the 2000s, small business owners increased their re- liance on their homes as a source of business capital. The decline in home prices has
reduced small business owners’ ac- cess to credit. In response to the higher level of non-performing real estate loans in their portfolios, banks have tightened lending standards for home equity loans, while at the same time falling home prices have weakened small business owners’ personal balance sheets, reducing their creditworthiness. In addition, the 28 percent decline in housing
prices since March 2006 has wiped out the equity that the typical small business owner borrowed against, given a standard loan to value ratio of 80 percent. The reliance on homes as a
source of business capital was greater in the states with larger declines in home prices. In short, small business owners’ use of their homes to fi nance their busi- nesses during the real estate boom contributed to the contraction in small business credit markets dur- ing the recession, particularly in the states hardest hit by housing price declines. The preceding is by Scott Shane of Case Western Reserve University, available at
http://tinyurl.com/49xl9b6. ■
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