Home Equity Funded My Business -- Now What?

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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?

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