Real estate and small business

Date posted: October 6, 2010

Statistics show that small businesses are suffering more than other firms in today’s economy. Small businesses, in particular, are having a very difficult time acquiring loans. N.C. State University extension economist Mike Walden explains why.

“I think there is a big tie in to what’s happened in the real estate market for two reasons: One, many small businesses are in areas like real estate; they are construction related. They may be builders to suppliers of materials to landscapers. And because the real estate business is off tremendously from where it was three or four years ago, those small businesses simply don’t have the work. And so they are simply not demanding the loans, and that is one reason why loans to small businesses are down.

“A second reason is broader, and that is that many small businesses, because they are small, rely on the equity that the owner of the small business had in his or her home as collateral for getting a loan. And, again, because home equity has dropped so much in the last three or four years — on average down 30 percent — this means that a small business (owner) who uses the home as collateral goes to a bank, and they are just not going to get the same amount of loan because their collateral is way down.

“So I think both of these reasons are obviously tied in to the real estate market, and it is going to require a rebound in the real estate market to get these kinds of small businesses back on their feet.”

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