When Richard DeMong's son needed capital for his business, he tapped his father's home equity line of credit after banks balked at financing his start-up.

"My son didn't have collateral or equity in a home, so I just made him a loan from my home equity line and charged him the same interest rate the bank was charging me," said Mr. DeMong, a business professor at the University of Virginia and national expert on home equity loans.

His experience may not be isolated. In a national study of consumers last year, 28% of borrowers who responded said they used home equity credit lines for business purposes - fourfold the percentage in 1988, the last time they were asked.

But interviews show that while most banks offer a variety of easy-to- access credit lines, few market any with the features - and lower interest rates - of home equity lines. Further, while most banks know that home equity is regularly tapped by business owners, few actively track the popular consumer loans so customers can be cross-sold other small business services.

"I don't think that as an industry we address the start-up phase of (small) businesses too well," concedes Larry Kucinick, senior vice president in the small business segment at Boatmen's Bancshares' Kansas City subsidiary. "There could be an opportunity there for us."

Experts say the fact that small business people are regularly tapping their home equity shows that there is a growing breed of entrepreneur who has assets and business experience that could make them attractive to banks.

Richard Curtin, the University of Michigan researcher who conducted the consumer survey, said the 1994 numbers may be a result of seasoned middle managers using their equity after being forced into the job market by corporate downsizings.

"Most people think that companies are only started by young people who have no collateral. This tends to show that there is a growing number of older people who have assets and experience," Dr. Curtin said.

But banks have been slow to respond with a product that matches the popular features of a direct home equity line of credit. Numerous bankers said they offer small business lines of credit that range from unsecured to ones backed by a second mortgage.

Still, many are priced at 200 to 500 basis points above rates on comparable home equity lines - an important cost difference for a developing business. Higher costs are not new to small firms, where owners have long used high-cost credit card debt to fund their businesses in early stages.

"A lot of individuals in start-up situations find that their business cannot support debt," said Jane P. Taft, senior vice president at Crestar Bank in Richmond, Va. "So they use their personal equity to capitalize the business until it is stronger."

She concedes that many small business borrowers may be using home equity lines, but says the bank does not have a system to track actively how customers use proceeds. "We haven't tapped into it at this point," said Ms. Taft.

Crestar is not alone. "It's a hot concern among lenders to know what these lines of credit are being used for," said Mr. DeMong. "At many banks they have an annual project to track it, but they find that a lot of checks are written for cash."

But some banks aren't as focused on tracking use as they are on offering a home equity-style small business product. Consider the case of Pittsburgh-based Mellon Banking Corp. The company offers a Business Builder account that allows borrowers to back credit lines with their equity directly and has more favorable rates and a simpler fee structure.

Other banks allow borrowers to use second-mortgage collateral, but regularly charge higher interest rates. Not everyone believes that small- business owners are being short-changed.

"I don't believe we're missing the boat in our market," said Grant Pavolka, senior vice president in charge of small commercial business at Seafirst, the Seattle-based unit of BankAmerica Corp.

The company offers an Express Line product with a $10,000 credit limit that is tied to the demand deposit account. It has been heavily used by an estimated 75% of the bank's customers with $1 million in annual sales or less. Users pay a $5 monthly fee whether they use the line or not and pay rates that average at least 200 basis points higher than comparable home equity lines.

"There is more inherent risk in a small business and the higher rate is justified," Mr. Pavolka said.

Not everyone agrees. Marty Nielson, Seafirst's executive vice president for consumer banking, says the difference in interest rates is not justified and will eventually disappear as the use of credit scores further consumerize small business loans.

Besides, he said, small business owners have long recognized that bankers penalize them if they use the same collateral - a second mortgage - to borrow directly for their business. "I think the consumers have outsmarted their lender a long time ago," he chuckled. "I think that clearly the attitude among bankers is turning."

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