New SBA Study: Structure of Household Debt of Small Business Owners

June 9, 2010 at 6:57 pm Leave a comment

This is an interesting issue for Snohomish County leaders to think about: How does the health of the housing market and household debt affect small business finances? Small businesses, especially home-based enterprises, and new startups rely on the business owner’s personal financial assets, including his or her home. Here is a summary of a new US Small Business Administration (SBA) study by George W. Haynes of Bozeman, MT on the subject.

Executive Summary

The study examined the debt structure of small business-owning households utilizing the Survey of Consumer Finances from 1998 through 2007. This study compared the debt structure of small business-owning households and other households to determine if those that own small businesses were more likely to hold selected loans and carry a larger percentage of total loan balances in these loans. In addition, this study compared the debt structure of small business- owning households with high income and wealth to ones with lower income and wealth to determine if households with more financial resources were more likely to hold selected loans and carry a larger percentage of total loan balances in selected loans than households with fewer financial resources.

This study found that small business-owning households were no more likely than other households to hold mortgages secured by residential property. However, small business-owning households were more likely to hold other loans secured by residential property and line of credit loans not secured residential property than other households; and these households held a larger share of total debt in these two types of loans than other households. However, these loans comprised less than 18 percent of the value of total loans held by small business-owning households in 2007. If small business-owning households have a larger share of total debt in selected loans, then some financial intermingling is likely to occur. This result suggests that some financial intermingling does occur; however, it represents a relatively small share of total debt.

Higher income, higher wealth small business-owning households held a larger share of total debt in other debt secured by residential property and a smaller share of total debt in installment loans than lower income, lower wealth small business-owning households. Clearly, the debt structure differs substantially between business-owning households with greater and lesser financial resources, primarily because the better off households are more likely to own higher valued residential property.

The decline in value of residential real estate will likely have profound effects on small business-owning households, and especially wealthier ones, because of the relatively large share of total debt secured by residential real estate. The likelihood of holding a mortgage secured by residential property increased from 64.7 percent in 1998 to over 73 percent in 2007, and the share of total debt held in mortgages secured by residential property increased from 51.5 percent in 1998 to over 59 percent in 2007 for small business-owning households. Given that small business owners often secure their household and business loans with residential real estate, the decline in the value of residential real estate will restrict their access to financial capital, even though the impacts of financial capital flowing from the household to the small business may be minimal. Additional work is warranted in examining financial intermingling; however, high quality panel data on small businesses, where financial information is available on the both the family and business, is needed to move this research agenda forward.

Download the study here.

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Entry filed under: Banking, Linking Household Debt and Small Business Finance, Small Business Finance. Tags: , , , .

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