Friday, April 24, 2009

Equity and the Small Business Owner

We knew that many business owners were using home equity to raise capital during the boom years. What we did not know was that often the capital was raised through the use of an Option ARM. Now the recasting ARMs that are severely underwater may cause the small businesses to fold while the homeowner/business owner potentially loses their property as well.

While it would be nice to blame this all on the bad decisions of bosses using your HELOC for everything became the advice of many financial planners and advisers during the bubble. Unfortunately many workers will be paying the price. First we will take a look at an article from the Sacramento Bee titled Exotic home loans could hurt business owners to see how bad things may get. Lets take a look -

Nearly 35 percent of the [California's] small-business owners used Option ARMs or other exotic home loans to finance their companies during the housing boom, according to a study released Thursday.

As those mortgages reset and monthly payments rise, scores of small businesses will be at risk along with the homes, the study concluded. The study was conducted by MerchantCircle, a Los Altos company that helps small businesses with Internet Marketing.


Samuel Bornstein, an accountant and business professor in New Jersey who analyzed the MerchantCircle results, said the use of exotic home loans will haunt business owners for several years. Bornstein, a professor at Kean University in Union, N.J., predicted a wave of foreclosures "that will dwarf the subprime crisis."

From the Map of Misery we know that California was the capital of the Option Arms. However the were taken throughout the country and the percent used by small business owners is unknown.

Following this up is another article about how much the small business owners are really hurting. The crutch is gone and may can not stand on their own. This article from the Wall Street Journal article titled Entrepreneurs Cut Own Pay To Stay Alive illustrates how bad things are getting. Let's take a look -

It's impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.'s small-business services division said recently that they were no longer taking a salary. That's a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.

During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent.

It's not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

With the equity gone and credit avenues drying up things are getting tighter and tighter for many small business owners. The affects of the housing bubble and subsequent bust onto small businesses will have long-lasting compounding affects.

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