Housing slowdown may pinch small business

By Emily Kaiser

CHICAGO (Reuters) - When Carol Venzin needed a loan to fund her hair salon business, the bank was happy to help -- provided she pledged her home as collateral.

Venzin, who owns a Fantastic Sams salon in Pittsburgh, Pennsylvania, and three more in Harrisburg, had ample equity in her house to back the loan, but as the housing market slumps, some other small-business owners may face a credit shock.

"It's difficult to get a loan without putting up your home as collateral," Venzin said, noting that consolidation in the financial services industry has left fewer of the community banks that have traditionally lent to small entrepreneurs.

Many banks have already tightened standards for residential loans. Small-business trade groups worry that if the housing slowdown deepens, corporate financing will get tougher, too -- particularly for business owners who rely on their homes as the main source of financing.

For many small business owners, that means their borrowing power would fall along with the value of their home.

Entrepreneurs have had "good access (to capital) in the last few years borrowing against their homes and other forms of credit, but now they're the first ones being curtailed," said Christian Weller, senior economist with the liberal think tank Center for American Progress. "That will affect employment, and it will certainly affect investment."

A credit crunch on Main Street is nothing to dismiss lightly, economists warn. Small businesses are key drivers of the U.S. economy, accounting for as many as half of the new jobs created, and entrepreneurs spend heavily on technology, hardware and equipment, Weller said.

Wall Street is already nervous about job losses in sectors such as construction that are directly tied to the slowing housing market, so any wobbles in the small-business sector could jeopardize the current economic expansion phase that began in November 2001.

TIGHTENING THE GRIP

Marilyn Landis, first vice chair of the National Small Business Association, estimates that 90 percent of small-business owners have some sort of financing tied to their homes, whether through a traditional home equity loan or using a home as collateral for business loans.

"So many of these folks have used their home to its absolute maximum in order to get financing for their business because that's the only way some businesses can get it," she said.

"Now, with the slowdown in the housing market and the slowdown in values and pricing, there's no equity left for these people," said Landis, who testified before the U.S. House Committee on Small Business earlier this month about access to capital. "It's worrisome."

The housing slowdown has exposed some questionable lending practices that became popular in recent years when double-digit gains in home prices were commonplace.

Many borrowers agreed to finance 100 percent of the value of their homes instead of the traditional 80 percent. Others accepted interest-only loans that left them with no equity when prices fell. As much as $1.5 trillion worth of home loans came with adjustable interest rates that are set to rise this year.

The Federal Reserve's latest survey of senior loan officers showed that banks were tightening credit standards for residential mortgages, and lenders expected credit quality on loans to both households and businesses to deteriorate somewhat in 2007.