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Small Biz Squeeze

Posted by: Prashant Gopal on April 28, 2009

Guest blog from BusinessWeek Banking Editor Mara Der Hovanesian: We highlighted the problems that some small businesses are having with paying their mortgages in a recent issue of the magazine. Small business employs about half of all U.S. workers and creates well more than half of new jobs in any given year, according to the Dept. of Commerce. They have also so far accounted for half the 5 million jobs lost. According to Jim King, state director for the New York Small Business Development Center in Albany, many struggling business owners are holding out hope that they’ll get a piece of TARP to tide them over during tough times.

But so far, federal funding has yet to trickle down to the smallest companies. “The longer we go without access to capital, the worse it gets,” says King. “With the housing bubble bursting, you’ve got the collateral that’s backing some small business loans deteriorating rather quickly. It’s a double whammy on the small business person. Meanwhile banks have totally clamped up lending.”

That double-whammy is particularly acute in California, where exotic mortgages proliferated and where most of the resets to higher interest rates are poised to occur. My colleague Prashant Gopal cited new research that says the resets may not be as dire as originally predicted

but that doesn’t mean people aren’t already nervous and having a problem making ends meet now. “A lot of folks used their homes to finance their business and a good percentage of those folks overextended and are having trouble making their payments now,” says Darren Waddell, vice president of marketing at MerchantCircle, an online networking community of 750,000 small businesses nationwide. Waddell surveyed some 70,000 members in California to find out how they were handling the recession and housing bust. He says that many of his members are worried about higher rates on their mortgages: “Many don’t know how their going to pay once that resets, which speaks to this waterfall that is out on the horizon.” Here’s a link to the survey questions and the results



BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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