Study: Small Firms Save Businesses Over Their Homes

Small business owners who had been at least 90 days delinquent on paying their mortgage were more likely to pay their business obligations rather than their mortgage, according to a new report from Experian.

Experian, a global firm that offers a myriad of services including credit report scores, conducted the study to determine the impact of a severely delinquent mortgage payment on a business owner's personal and business credit behavior. For the study, the company compiled a sample of 2.7 million business owners and analyzed their payment behavior with their mortgage from April 2007 to April 2008. There are about 27 million small firms in the United States.

Experian's North America databases contain more than 65 terabytes - that's 65 trillion bytes - of data and it maintains credit information on approximately 215 million U.S. consumers. To conduct the study, Experian said it leveraged proprietary data and used special linking technology from its Business Owner Link database, which connects small-business owners with their home addresses.

The company, which has headquarters in Dublin, Ireland, showed that because of ailing equity, high mortgage payments and limited refinancing options, business owners chose to ensure their business's survival by preserving their source of income at the risk of losing their home.

The study also found that small business owners are now relying more on commercial lending rather than personal financing to support their businesses.

Torsten Gerwien, vice president of decision sciences for Experian's Business Information Services, told the Small Business Blog he was surprised by some of the findings.

Gerwien, who was a lead researcher on crunching the data, said he had headed into the project thinking that small business owners would pay their mortgage before their business expenses. He also said he found it interesting that business owners were less risky on their home mortgage than the average homeowner -- four out of 100 homeowners became severely delinquent on their mortgages versus three out of 100 business owners.

Gerwien attributed that to business owners relying on the "stability of their business cash flow and being more financially savvy to likely finance their housing as they would their business."

The company is keeping the full study private but shared a few details. The four states that he said "really stuck out" in terms of newly minted severe delinquencies on mortgages among business owners were Nevada, Florida, California and Arizona. Experian also shared a PowerPoint presentation on the study's findings that said the mortgage crisis has not peaked.

The report found the top four industries where small businesses were most impacted by the housing crisis were: transportation and utilities; construction; retail trade; and financial insurance and real estate. Experian attributed those findings to a weak economy, high gas prices and stalling construction growth.

Gerwien said the data also revealed that small business owners are swinging back to using commercial lending after a period of using personal financing to aid their businesses. "After a period of using personal financing, businesses are switching back to commercial lending now that consumer lending is tightening."

He said he hopes business owners will walk away from the study's findings realizing that there's still commercial funding around as long as they're making payments.

"Small firms need to maintain relationships with creditors and work on having a positive payment profile" even if they're not in the market for credit, he said. "It's a reminder to small business owners to keep business credit in good standing or to think about establishing it because it can be very valuable to them."

He said lenders should review the study and realize that 60 percent of those businesses with mortgage troubles were paying commercial obligations promptly before and after severe mortgage delinquency. He also recommended that lenders don't just examine a potential client's consumer score, but should consider a blended score of consumer and commercial information.

By Sharon McLoone |  September 8, 2008; 3:49 PM ET Data Points , Economy Watch
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