Home Equity Funded My Business -- Now What?Steve Strauss wrote the bible on small biz. Literally. In addition to authoring The Small Business Bible, he runs MrAllBiz.com and is a featured columnist for USA Today. He's been studying, writing and speaking about how to grow a successful small business all his life, so email him with whatever leaves you stumped.
Q: I have a tough one for you! For years I have used my home equity to grow my small business. Whenever we needed money -- for whatever reason -- I would refinance. But now, with the mortgage crisis, doing so suddenly is a lot harder. What am I to do?
-- Larry, Photographer, New York
A: Is that your best shot?
So let's see, what we have here is a small-business person whose seemingly ever-growing home equity became his business safety net, or better put, his real estate ATM. He is not alone: Millions of entrepreneurs have done the same thing.
But now, because of the subprime crisis, banks will make continuing to do so more difficult. I mean, even Bank of America (BAC) , probably the largest small business bank in the country, recently decided to lay off 700 workers, stop offering home mortgages through brokers and bring the operation in-house.
So what do you do if the home-equity spigot has been turned off? Fear not, options still abound:
1. Credit cards: There are two kinds of debt: Good and bad. Good debt is reasonable, manageable and helps you improve your life. A mortgage is usually a good debt. Student loans can be a good debt.
Bad debt? We all know what bad debt is, eh? It's that trip you took to Bermuda on that nearly maxed-out high-interest credit card.
Using your credit cards to fund your entrepreneurial dreams can be a perfectly fine debt, as long as you can handle it and have a plan to pay it back in a reasonable amount of time.
2. SBA loans: The Small Business Administration does not make loans, but it does have a great loan guarantee program. And because these loans -- made by regular banks -- are guaranteed by an agency of the federal government, they are easier to get than conventional business loans -- and the rates are usually better, too.
There are all sorts of loans available:
- Microloans: For small loans up to $35,000.
- The 7(a) Loan: This bread-and-butter SBA loan is available for up to $2 million.
- The 504 Loan: Can be used for equipment, modernization or to acquire business real estate.
3. The friends and family plan: Most small businesses are still started with help from friends and/or family. The guys who invented Trivial Pursuit started out by giving friends and family shares of the company for investments of $1,000; not a bad deal in retrospect.
The good news with a friendly loan is that you will probably get excellent terms. The bad news: If you default, there will be hell to pay.
4. Partners: Business people bring in partners, silent or otherwise, for a variety of reasons. For instance, I am starting a huge new project that is a bit of a stretch, so we are teaming up with another company that has more experience in this realm. Similarly, bringing in a partner who is flush is not a dumb idea at all.
5. You: Do you have an IRA you can raid? What about a whole-life life insurance policy? No, these are not the best solutions, but who said entrepreneurs were reasonable?