Entrepreneurs' Use of Home Equity Loans During Credit Crises

Abstract

During the Great Recession home equity loan balances increased despite aggregate home equity falling (and overall debt not changing). Entrepreneurs are responsible for 77% of this increase, while only representing 13% of the population. I argue that this reflects entrepreneurs having to rely on loans backed by personal assets to overcome the crunch. I use micro-data on entrepreneurs' finances from the 2007-2009 panel edition of the Survey of Consumer Finances to establish that (1) of entrepreneurs in 2007 homeowners were less likely to exit by 2009 (18%) than non-homeowners (28%) and that exiters had less home equity and lower access to home equity borrowing; and (2) new entrepreneurs in 2009 had 63% more home equity than those in 2007, despite house values falling. This leads me to conclude entrepreneurs substituted scarce business financing opportunities for personal financing, in the form of home equity loans. In sum, loans backed by personal assets, specifically their home, allowed entrepreneurs to alleviate the pressures of tightened credit standards.