Many small business owners use home loans to finance their companies, but studies show that may not translate to a successful business.
Mixing business with pleasure is still not a good idea.
Business owners often tap into home equity loans to finance their companies, as home loans are typically easier to obtain and have better tax advantages, Small Business Trends reported. About one-quarter of small business owners borrow against the equity in their homes for business purposes, or pledge their home as collateral on those loans, according to data Small Business Trends cited from Barlow Research.
Since declining home values made it more difficult for small business owners to use home equity as a source of business capital, some small business advocates are pushing for policies that would make it easier for owners to use home loans to finance their businesses. They argue that these government policies would facilitate entrepreneurship growth.
But these public policies may come with bad seeds. Laws that allow mortgage loans to be used for purposes other than financing real estate boosted the number of entrepreneurs in Denmark by 4 percent, according to a study by researchers at University of Copenhagen and Harvard Business School. The study also revealed that Danish businesses that benefited from the new mortgage rules were significantly more likely to fail than a control group of businesses. What’s more, if the businesses that benefited from the regulatory change survived, they often produced lower sales, profits and employment than the other companies.
“Letting business owners use home equity to finance their businesses removes the banks as a constraint on entrepreneurial activity, leading more people to pursue their business dreams,” Small Business Trends reported. “But this encouragement of entrepreneurship comes at a cost. The marginal businesses that get started tend not to succeed.”
In May, 29 percent of all owners reported borrowing on a regular basis, according to NFIB’s latest Small Business Economic Trends report. Only 2 percent of business owners reported that financing was their top business problem last month. For more details on the state of the small business economy, dive into the report, which is released on the second Tuesday of each month.
