Two things come together for me today, both related to the real world of financing startups with home equity.
The first of the two is the following comment to my blog post Q & A: Investment: Size Matters over at the bplans.com blog:
…along with a partner are starting our own wedding consulting business we were home based for 5 years but now we are expanding to a building. We are both investing $100 000, my question is how much do you think a bank would loan a new business?
The second is Homeowners Feel the Pinch of Lost Equity in yesterday’s the New York Times. That story isn’t about borrowing to start businesses, but it is about borrowing off house equity:
But now, in an ominous portent for the national economy, Mr. Whittey has grown tight with his money. His home is worth far less than it was a year ago, and his equity has evaporated. And like many other involuntary adopters of a newly economical lifestyle, he can borrow no more.
“It used to be that if I wanted it, I’d just go and buy it and finance it,� Mr. Whittey, 33, said. “I’m feeling the crunch, and my spending is down significantly.�
The Whitteys and others like them are at the center of deepening worries that the economy is headed for a substantial slowdown, possibly even a recession, as the artery of cash from Americans borrowing against the value of their homes has sharply narrowed.
These two come together for me with the reality that so many startups are financed by home equity. The real answer to the first question above, “how much would a bank lend me,” is that the bank will lend you about as much as your house equity would support. That’s an over simplification of course, the real detailed answer would be more complex than that, but it is the executive summary.
One of the steady streams of experts’ answers that we see all the time in the world of starting a business is that the bank won’t loan you money for your business idea unless you have collateral. It’s illegal. The law makes banks protect their depositors by not allowing them to speculate on your great new business unless you have collateral to pledge. And collateral means that if you don’t pay back the loan, you’re going to lose the collateral, which in the context of this discussion means you can lose your house.
And that takes us to the second part of this post, which is that as house equity loses value over financial problems, that affects startups that are being or might have been financed by house equity.
I say it a lot to entrepreneurs: don’t bet the house. But a lot of us do, anyhow. I’ve been there myself, with multiple mortgages and lots of credit card debt to start a company, but I don’t recommend it. Do as I say, not as I did.
This entry was posted on Friday, November 9th, 2007 at 3:56 am and is filed under startup financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.Leave a Reply
