David Kirkpatrick

July 9, 2009

Home equity credit crunch hurts entrepreneurs

Many small business have been relying on home equity loans as opposed to Small Business Adminstration loans or lines of credit based solely on the business. This avenue of funding has proven to be very, very volitile in today’s financial market. As home value drops, banks are very quick on the draw to freeze home equity credit. Just one more obstacle in the path of Main Street business.

From the link:

As home equity lines vanish, other avenues of small business financing are also running dry. More than 40% of small business owners polled in April by the National Small Business Association said the limits on their credit cards had been cut in the past year, and 63% said their interest rates went up. Bank lending is in freefall. Even with stimulus incentives, the SBA backed 30% fewer bank loans to small businesses last quarter than it did a year earlier. The agency’s lending volume has dropped to less than half what it was before the recession set in at the end of 2007.

The allure of home equity loans is their liquidity: Business owners can tap cash without submitting detailed business plans. But easy access can be a double-edged sword.

“Used properly, home equity lines of credit are great and get the job done. But a business that isn’t self-sustaining can’t pay it back, and that’s where the problem lies,” says Norm Bour, a debt management strategist and founder of BusinessCashFlowPros.com in Laguna Niguel, Calif.