A recent survey conducted the National Small Business Association reported that about 30 percent of small business owners use home equity loans for funding. Following credit cards, home equity loans are on par with bank loans as the primary financial product used by small businesses. Unfortunately, the declining real estate market impacts this source of funding for small businesses in two important ways:
- Declining property prices and the increasing amount of houses for sale has decreased the equity in homes. Less equity in homes means less funding available for small business owners to tap into.
- Stricter regulations have reduced the loan to value (LTV) available in homes, making it difficult and time consuming for business owners to access the equity in their homes.
Both these factors pressure small business owners to rely on expensive financial products like credit cards. Banks will still work with small businesses for lines of credit and traditional loans but their credit criteria are tightening.
So what should small businesses do to plan for growth?
Small business owners should work with a good accountant to ensure taxes are filed on accrual basis so cash flows are strong enough to fund a deal. Also, banks are more willing to extend a line of credit when borrowers provide an aging accounts receivables statement. Even collaborating with credit card companies to consolidate debt to raise more capital can provide small business owners with a funding cushion.
Despite tightening credit norms, banks are still frequently lending to small businesses. Actually, small business loans are smaller and more profitable for lenders than the loans that mid size and large businesses require. The key is to be proactive, prepared and informed about the accessibility of financial products in the marketplace.