Home equity lending to small-business owners up since 2021

Small-business owners are turning to home equity to help finance their expenses, a trend that increased noticeably during the pandemic.

A provider of home-equity lending alternatives, Hometap, reported it made more than three times as many investments in dollar value with its small-business-owner clientele in the first quarter this year compared to the three months in 2021, increasing deployment to approximately $8.5 million from $2.3 million. Since 2018, the Boston-based fintech has assisted small-business owners with more than $30 million in home-equity transactions.

Hometap’s investment product allows clients to tap into their home’s equity in exchange for a percentage of the future value of the property. Unlike small-business loans or home-equity lines of credit, no interest or required monthly payments are required for 10 years, the company said. 

“It goes without saying that the past two years have been incredibly difficult for everyone, and business owners have demonstrated incredible strength and resilience in the face of countless challenges," said Jonathan MacKinnon, vice president of product strategy and business development at Hometap, in a press release. 

Small-business owners likely relied more on home equity to stay afloat than other consumers in the first year of the coronavirus when many of them were forced to close for months, according to data from Federal Reserve Bank of New York. While small-business owners take out home-equity lines of credit, or HELOCs, more frequently and carry higher balances relative to the general population to begin with, bank researchers found the difference grew even wider in early 2020. 

Average HELOC balances among small-business owners increased 3.4% between February and May 2020, even as they decreased 0.6% among other borrowers. The average HELOC balance had been falling overall for several years before the pandemic’s onset. Subsequent months also revealed small-business owners lagging other borrowers in paying down their balances by about 4% between May 2020 and March 2021.

The U.S. Small Business Administration Office of Advocacy estimates approximately 32.5 million companies with fewer than 500 employees were operating nationwide at the end of 2021, up from 31.7 million a year earlier. Between 1994 and 2018, the five-year survival rate of small businesses was 48.8%, while 33.6% lasted at least 10 years.

Hometap is one of several startups offering consumers the opportunity to tap into their home equity to attract the interest of venture capitalists in the past few years. Between December and January alone, the fintech secured more than $300 million in funding, while other new companies also entered the space in the prior eight months. Also, earlier this year, Unison issued what it claimed was the largest securitization of home-equity bonds.

The growth of the home-equity alternative lending segment coincides with the rapid increase in property values, with the tappable amount at close to $9.9 trillion at the end of last year, according to data from Black Knight. Other sources estimated that home values have increased close to 20% on a year-over-year basis in the first quarter.

Following its recent procurement of capital, Hometap has expanded its footprint, launching operations in South Carolina and Nevada in April, increasing the number of states it conducts business in to 18.