HELOC's and Small Business Loans Rise and Fall Together

One of our readers sent this in:

Here is an article from the Business Section of Sunday's Oregonian. It's about small businesses having trouble getting loans. HOWEVER, note that all the personal stories in them have one thing in common: the businesses were started with sizeable HELOCs as a source of funding.

I think you've mentioned this on your blog before - there are a lot of small businesses that have been funded by home equity. The banks are realizing that all of this lending was inter-related and as a result, the credit risks that were often viewed in a vacuum are now being exposed as inter-related and deeply troubled by the downturn in housing.

Reggie brings up a great point here. If banks are holding small business loans and HELOC's that are funding those businesses, they have much higher risk than they think they do. I believe some of the recent decisions are an overreaction to realizing that risk, but that's typical. It's going to be rough for a lot of small businesses as the economy tightens and they can't support themselves.

Clint beat me to this post, and has lots of great comments already on his blog, but I still wanted to bring this point out. Thanks for the tip Reggie!