Posted by: John Tozzi on September 8, 2008
Small business owners are more willing to default on their home mortgages than on their business debts, according to research out today from credit bureau Experian. Some 312,000 business owners were at least 90 days late on a mortgage payment at some point between April 2007 and April 2008. That’s 2 percent of all business owners with mortgages, a lower rate than the broader population of homeowners (almost 4 percent).
Business owners protect their companies even at the expense of their homes to keep their source of income intact, according to Experian. “Particularly for those who have had a severe mortgage delinquency, these people are seeing absolutely punishing equity reductions, they’re seeing refinancing options dry up, and they’re looking at their business as being a stable source of cash flow,” says Torsten Gerwien, Experian’s vp of decision sciences.
I also imagine many people in this situation may be non-employers or micro-business (fewer than 10 employees) owners whose personal finances are pretty much intertwined with their businesses. Their business debts may be smaller and easier to pay than their mortgages.
Some other surprises after the jump.
1) The rate of mortgage delinquency was about the same regardless of how old the homeowner's business was or how many employees it had.
2) Even after falling behind on mortgages, small business owners were able to access business credit, particularly trade credit from suppliers.
Experian is in the business of selling data to people trying to determine whether a potential borrower will pay them back. Their big-picture takeaway is that even small business owners severely behind on their personal mortgages may be good credit risks for business-related lending. But because small businesses are often evaluated based on the owner's consumer credit score, they may appear to be riskier borrowers than they actually are.
Says Gerwien: "For the business owner that’s got mortgage trouble, there’s still commercial funding available as long as you’re making your [business] payments properly." After a delinquency, the personal credit available to business owners declines, so they turn more to commercial financing, especially trade credit from suppliers, Gerwien says.
Experian also found that there was no peak in delinquencies in the April '07 to April '08 period -- the trendline just goes up. The problem disproportionately hit states like Nevada, Florida, and California where the housing bust was most severe.
Some caveats about the data: These numbers are culled from an Experian database that links consumer credit profiles with business credit profiles. The delinquencies include all types of mortgages, including primary, home equity loans, loans for second homes or investment properties, etc.