Small Business and Home Equity

Interesting article centering on from the Providence Journal regarding Rhode Island small businesses owners using their home equity to fund their businesses. Due to the challenges to get more traditional loans many are turning to their homes to lend them the necessary funds. As one would guess this is becoming problematic - prices are dropping so the equity is not available to borrow which then hurts the businesses. Here are some interesting parts -

“Let’s put it this way: If you know you’re going to get laughed at in the face, why ask?” Deion said. “People are using home-equity loans and their credit cards ... and they’re paying 13 percent [interest]. The reason is it’s easier to get the money. … It’s the path of least resistance.”

SBA lending in Rhode Island has declined, Deion said, in large part because state lawmakers in 2005 repealed a tax credit that reimbursed small-business owners for certain loan fees. Also, Congress a few years ago discontinued its subsidies for the SBA program, which further eliminated incentives to participate, he said.

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A Federal Reserve report released in February found that a third of banks in the country had tightened their lending standards for small-business loans.

To make matters worse, small-business owners who have been using home-equity lines to finance their businesses, Deion said, now find that their houses are worth less — so some have little or no equity to borrow against. Business owners who relied on credit cards are also getting squeezed, he said, since credit-card companies begin to hike rates in unison whenever a cardholder misses a payment on one credit card. The practice of creating a “universal default rate,” he said, began about 1 ½ years ago.

Since it is the smaller businesses that have so much growth opportunities this could amplify the current economic situation.