The housing market’s impact on small business lending

Today’s Wall Street Journal had a page 1 article called “When the Home Bank Closes” – which looks at the impact the housing collapse is having on small business lending. 

 As we all know, home equity borrowing is a great source of funds to finance the early stages of growth and development.  The article points out that Wal-Mart’s Sam Walton and Sam Adams beer brewer Jim Koch both used this technique for early funding for their businesses.  A 2009 survey conducted by Gallop for the National Federation of Independent Businesses found that nearly one in three small business owners borrowed against home equity or used the home as collateral to fund there businesses.

With the housing collapse, the balances of home equity lines of credit and second mortgages are down over 27% since 2007.  According to the WSJ, “That leaves cash-strapped small businesses in a jam.”  Or a pickle.  The article quotes Mark Zandi, chief economist of Moody’s Analytics, who estimates that “small business ownersextracted around $75 billion from their homes to fund their businesses in 2006.  That has fallen to as little as $20 billion now.”

The author found several examples of entrepreneurs who are short of capital due to falling home prices and credit lines that had been yanked.  The article concluded with a quote from one of them:

As an entrepreneur,  it’s your job to basically pull a rabbit out of your hat on a daily basis.  That’s how hard it is right now.




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