One would not think home mortgages have a hell of a lot do with entrepreneurship. But they do.
We are clearly in the middle of a huge housing bust. Almost all homes have lost value and many are in foreclosure. What has not been well-publicized is the effect this catastrophe is having on small business, particularly those entrepreneurs trying to start a new firm.
A page one piece by Robbie Whelan in the WSJ (Feb. 1, 2012) cites Mark Zandi, chief economist at Moody’s Analytics. Zandi notes that small business owners extracted $75 billion from their homes to fund their businesses in 2006. This year Zandi projects this number to be under $20 billion. According to Zandi, the implication of this for the parvenu entrepreneur is dire indeed.
He tells of his own experience of starting Moody’s Analytics in 1991 with a $40,000 loan using his Philadelphia home as collateral. He doubts this could happen again without great difficulty. Zandi says, “That is one more reason the be nervous that small businesses won’t be the source of job growth they have in past economic recoveries.”
New companies often have insufficient cash flow to qualify for normal business loans. If they can’t borrow against their home they’re dead. A recent study from Pepperdine University says 64% of current start-ups are rejected for bank loans.
In the same article the WSJ records the case of Adrian Pelkus, a San Marcos, CA business owner who started six different businesses since 1985. Mr. Pelkus thought he had his best idea ever–to generate power from ocean waves. He patented his idea and produced a prototype and wanted to borrow against his home to do lab tests and marketing to investors. However, the three homes he owned were $100,000 underwater. Banks would not lend to him. He had to give up on wave power and let his patents expire.
Mr. Pelkus is not alone. Robbie Whelan states, “Many small business owners see their home-equity lines of credit pulled or reduced when home prices fall. In its quarterly survey of about 400 small to mid-size businesses, conducted this past fall, Barlow Research Associates, Inc., a Minneapolis-based data provider, found that 41% of small businesses reported seeing their home-equity credit level decrease in the previous year.”
All this is not good news the the long-term health of the economy, despite recent green shoots. The closing window of home-equity borrowing has serious implications for entrepreneurship and the creative small business engine that must provide the major mojo for prosperity and healthy employment.