By ANGUS LOTEN
"Take Two" is an ongoing series about first-time business owners over 50 by Angus Loten, a small-business reporter for the Wall Street Journal.
Craig Holman is betting the farm on his new business -- literally. After getting laid off from a high-level job in the steel industry, the 58-year-old engineer put up his share of the family farm as collateral for a loan to open an emergency home cleanup service in Columbus, Ohio. "Having the farm on the line has made me pretty focused," says Holman, who launched the business early last year with his wife as a partner. The hardwood tree farm has been in Holman's life for years.
It's also the key to Holman successfully opening his AdvantaClean franchise. Small-business loan brokers say collateral is now king among risk-averse lenders. Loans to small companies have decreased by some $60 billion since the 2008 financial market crisis, according to the Small Business Administration. Much of that decline reflects the near extinction of unsecured loans, which were fairly common among small-business borrowers before the recession.
Past Job: High-level engineer in the steel industry
Current Job: Owner of an AdvantaClean franchise
Holman's $85,000 loan -- along with part of a severance package from his former job -- enabled him to pay a one-time franchise fee to AdvantaClean, buy a truck and purchase equipment for water-damage recovery, mold removal, duct cleaning and dryer vent cleaning. He also hired one full-time and three part-time workers and an office assistant. Although his official launch was in January 2010, Holman says he "started getting jobs before we even opened the doors." He now gets three to four calls a day from homeowners with flooded or moldy basements. About a third of the calls translate into paid work. While prices vary, a typical mold-removal job can bring in $3,000, he says.
Banks now divide small-business borrowers like Holman into two groups: those with collateral and those without it. Collateral is any tangible asset -- typically a home, factory or property, or even equipment, machinery and inventory -- that can be put up as security for repaying a debt. In the event of a default, lenders can seize these assets to recoup the funds through sales or auctions. According to BoeFly.com, an online marketplace that matches lenders and borrowers, most of the lending institutions on its site now favor asset-heavy borrowers, such as restaurants, retailers, hotels and manufacturers.
The chances of accessing credit without collateral, at least through traditional, and typically cheaper, bank loans, are pretty rare. An analysis of 250 small-business loan applications conducted by MultiFunding, a Philadelphia-based lending brokerage, found nearly half were deemed ineligible due to a lack of collateral, despite good credit scores and cash flow. Instead, these businesses were limited to more costly alternatives, such as factoring, cash advances or peer-to-peer loans. (As many as 15% couldn't qualify for any of those loans either, the analysis found). "I can find a loan for 90% of the small businesses that want to borrow. The question is can they afford it," says MultiFunding chief executive Ami Kassar. "Without collateral, it's really the wild, wild west out there."
One of the most common forms of collateral entrepreneurs use is their home. Of the 750 small businesses surveyed in 2009 by Gallup for the National Federation of Independent Business, 16% said they had borrowed against the value of their homes for business purposes, while 7% put up their homes as collateral. An earlier survey of some 1,000 small-business owners by Barlow Research found about 20% had pledged their homes as collateral for a business loan and 18% borrowed against their homes for a personal loan they used for business financing.
But this strategy is becoming more difficult. Since the housing market crash, small-business owners have struggled to tap real estate for business financing amid plummeting home prices. Last year, the Federal Reserve Bank of Atlanta reported that 15% of small firms cited lower equity in business or personal real estate as a barrier to credit for their businesses.
At the same time, business owners in a Federal Reserve focus group whose debt was linked to residential real estate said lenders were now asking for even more collateral to offset losses in real estate values. Lenders typically apply a 20% to 25% discount on the net value of the property -- that is, the total value of the property minus any outstanding mortgage. The discount can be as high as 50% of undeveloped land, equipment or machinery. What's more, home equity lines of credit have declined by $31.5 billion since the housing bubble burst, eliminating some $7.9 billion in credit available to business owners, according to estimates by the Federal Reserve of Cleveland. All this is unlikely to change until the "housing market picks up and banks ease collateral requirements," says MultiFunding's Kassar.
Ironically, the slumping housing market has been a major boon for Holman's business and a key source of revenue to pay back his loan. Real estate agents looking to clean up foreclosed properties, most of which are left without power, are some of his biggest customers. Typically, he'll waive the $50 inspection fee for these jobs because so many convert into paid work. This year's wild weather is also boosting demand for emergency services, with many jobs routed to him from AdvantaClean's central 24/7 call center. During major storms, calls can come in around the clock and his crew will work through the night. "Every situation is an opportunity," says Holman.
So far this year, business has nearly doubled compared to 2010. Holman says he's now planning to invest in new equipment and looking to expand. "In the steel industry, I had a false sense of security," he says. "I've got a lot on the line here, but so far I see nothing but upside."