It's getting harder and harder for homeowners to tap into their home equity for purposes of debt consolidation. Eligible business owners may find their best alternative is an SBA loan.

In the 1980s, the pop rock group Genesis hit the charts with "In Too Deep." Although Phil Collins and his band mates were actually crooning about love, debt-ridden borrowers are just as familiar with that 'in too deep' feeling. Thankfully, while home equity debt consolidation loans are drying up, another type of funding is stepping in to fill some of the void.

The business of small business

The U.S. Small Business Association (SBA) is a federal entity that supports the interest of-you guessed it-small businesses. For many years, the SBA has offered financing programs to qualifying companies, funding start-ups, expansions, working capital, and debt consolidations. The SBA doesn't actually make loans, but it does partially guarantee them. This reduces the risk for the lender, which translates into a better rate for the borrower.

What does this have to do with the current crisis in mortgage lending? During the days when mortgage loans were free flowing, many entrepreneurs found it easier to tap home equity for funding rather than pursue an SBA loan. But now that mortgage lenders are tightening the reins, the SBA is poised to pick up some of the slack. As a result, an over-burdened business owner who can't get a home equity debt consolidation loan isn't necessarily out of options.

No easy pickings

Obtaining SBA funding is like getting any other type of loan. There are forms to complete and requirements to meet. In general, business borrowers are expected to have some of their own money invested in their enterprises. If the firm is worth $100,000, for example, the SBA will not fund a $100,000 recapitalization loan. Instead, the owner is expected to pitch in 25 to 50 percent of this amount. SBA borrowers also need to have a strong grasp of the marketplace in which they work, which is usually demonstrated with a written business plan. Lastly, business owners must have good credit and the resources to repay the loan.

Those interested in pursuing an SBA loan for debt consolidation can start by visiting their bank, the website of the SBA, or the SBA's nearest field office. One could also enlist the assistance of a Prequalification Program intermediary, who provides counseling and loan packaging help to business owners who aren't sure exactly what they need or what their options are. Small Business Development Centers (SBDCs) are the best place to start, as loan packaging is free. If you visit a for-profit entity, a fee will be charged for this service.

Being saddled with that "in too deep" feeling is no way to run your business or your life. Try contacting the SBA; it just might be the debt consolidation option that's right for you.

Published on February 29, 2008