Working from home a hazard

When your home is also your office, the housing slump can hit doubly hard.

That's the situation facing a growing number of owners who run microbusinesses, which are small, often home-based companies that employ nine or fewer workers.

A new report from the National Association for the Self-Employed in Washington, D.C., found that 62 percent of microbusiness operators said they're concerned sliding home values will affect their ability to survive and grow.

Eighteen percent of respondents reported having adjustable-rate mortgages, and they're faced with resetting interest payments that could mean they're out of house and headquarters alike.

But the 60 percent of participants who took out fixed-rate mortgages aren't immune to the housing downturn: Falling values and rising foreclosures everywhere mean borrowers with safer, traditional mortgages can no longer rely on home equity to finance expansion. Big lenders such as Countrywide have frozen home-equity lines of credit for virtually all their Nevada customers, while other banks have constricted loans for all but the most creditworthy borrowers.

"Because so many home-based business owners use the equity in their home to grow or keep the business afloat, they're in a dire situation when home values are dropping and the credit market is tightening," said Kristie Darien, executive director of the National Association for the Self-Employed.

Though they don't individually employ huge chunks of workers, small companies collectively exert major influence on the local and national economies, Darien said. Microbusinesses employ 26 million Americans. Guesses on the number of self-employed workers in Nevada range from 83,000, which the state Department of Employment, Training and Rehabilitation estimates, to 155,000, which the National Association for the Self-Employed tabulates based on data from the U.S. Census Bureau and the Internal Revenue Service. That's anywhere from 5.6 to 10.5 percent of Nevada's 1.4 million-worker labor force.

Many of those entrepreneurs view their home as both central office and key asset. Among small businesses nationwide, 52 percent operate out of a residence. Nearly a third of small-business owners testified to using home loans for financing, according to a 2007 study from Discover Small Business Watch. Plus, housing loans made up nearly half of all funds for business operators who borrowed against their home to finance a company, a 2007 study from Middle Tennessee State University found. When such a primary funding source evaporates, company expansion stalls.

"If entrepreneurs can't get money to start a business or reinvest in growth, they may close their doors, or they may just stop growing and bringing jobs and revenue to our economy," Darien said.

Cheryl Blomstrom, director of the Nevada chapter of the National Federation of Independent Business, said her organization's members also face issues tapping into home equity to pay for growth. The struggle to find financing now goes well beyond subprime borrowers and cuts across all demographic groups, she said, as lenders curb loans and watch while federal lawmakers debate legislation to stop the housing slide.

"Home equity, especially in the Las Vegas market, has practically dried up," Blomstrom said. "Lenders are really gun-shy right now. They're waiting to see what Congress might do."

That waiting costs companies, and the broader economy, some long-range gains. Today's smaller operation is tomorrow's mid-sized or large enterprise, so starving small businesses of funds today could mean less growth later.

"We do see a food-chain effect with job creation," said Dallas Haun, president and chief executive officer of Nevada State Bank. "Ultimately, job creation traditionally has come from small businesses in America. If they can't find funding, they can't grow. They can't hire."

To forestall additional financing declines, Darien's group wants to see policymakers acknowledge the "sweeping effect" the housing downturn has on home-based businesses. She said she hopes for legislation that would help stabilize housing prices and address rising energy costs.

In the meantime, she advises smaller firms to consider thinking outside the house in the search for business funds. Most microbusiness owners need smaller infusions of cash.

That's where programs such as the U.S. Small Business Administration's express loan program can help, Darien said. The service offers loans of up to $50,000. And then there are grants. The National Association for the Self-Employed, for example, runs a business-development program that provides up to $5,000 for expenses, including marketing or equipment purchases.

Whatever you do, skip the temptation to finance growth with credit cards, Darien said. Their high interest rates make them an unstable borrowing option for home-based entrepreneurs.

Also, don't assume traditional borrowing avenues are closed, Blomstrom said. It's tougher to obtain a home-equity loan today, but it's not impossible, depending on the amount of equity a borrower owns and how high his credit score is.

Nevada State still offers home-equity loans to some customers, Haun said, and the bank also tracks down financing alternatives for borrowers who don't qualify for home-based funds. For example, some entrepreneurs who missed out on home-equity loans qualified instead for loans through Nevada State's SBA 7(a) program, which lends up to $2 million.

"We try to find a way to help our clients and prospective clients," Haun said. "If equity is not in the home, we pursue other options, whether they qualify on unsecured cash flow, or they qualify for a loan secured by accounts receivable or equipment."

Frank Trotter, president of Florida-based consumer and mortgage bank EverBank Direct, said his company sees increasing numbers of homeowners in Nevada and elsewhere who have already borrowed the maximum they can based on their home's equity. But the resulting credit crunch is a short-term issue, Trotter said. EverBank is developing new business-growth programs "for down the road," when the economy improves. That could happen sometime in 2009, he said.

"There is a light at the end of the tunnel," Trotter said. "While there may be a temporary decline in available equity that will impact small businesses, we think in the long run that home equity will be a great way to finance sole proprietorships and other small companies."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.