The February 1, 2012 Wall Street Journal had a front page story about how many small businesses, including a lot of start-ups, can’t fund their business because their traditional source of collateral has disappeared. That source is home equity that they used for either a personal home equity loan or for business loan collateral.
The housing market collapse has far reaching tentacles. According to this article one of every three small business owners have tapped into their home equity for a loan. This list includes the founders of Wal-Mart and Samuel Adams Brewing. I know that almost every business acquisition loan I’ve seen has used home equity as secondary collateral.
SBA guaranteed bank loans can be the answer for some ongoing business but it’s tough to justify a loan to a new business. Start-up businesses are risky. That’s why most start-ups are financed by personal funds, friends, family, angel investors and (eventually for some) venture capital.
Maybe this is the reason the SBA is now looking at some programs to finance start-ups. Without home equity the job creation from small businesses is not as robust as it could be. It may be that many businesses will have working and growth capital problems until real estate market rebounds.
“‘As a matter of fact’ is an expression that precedes many an expression that isn’t.” Author Laurence J. Peter