How Reverse Mortgages Can Boost Emerging Older-preneurs Boom

Last Updated on Monday, 29 March 2010 09:53 Monday, 29 March 2010 09:25

The odds were against them. The two women n their 50s, one from France and the other from California, had no experience owning or running a restaurant.  Yet they forged ahead with nothing more than a vision to create “a country French restaurant,” their passion for French cooking, and their capacity for hard work.

Startup cash was so tight they had to max out their credit cards to buy stove, dishwasher, freezer, chairs, tables, utensils, and other capital equipment for their restaurant. The run-down Victorian-styled house they bought in downtown Marshall (Texas) needed so much work they had to knock heads with city officials over permits, inspections, re-inspections, approvals, and re-approvals.

Parking was another headache because it took two months for the city council to approve their parking lot. Since parking was required for them to open for business, their neighbor allowed them to use eleven parking spaces that had to be documented for city officials. And there was the city engineer’s grand-opening-day surprise.

The city’s fire department had signed off on their building for fire, but minutes before they were to open, the city engineer stopped by and said “no way.” He decreed on the spot that they needed another door, so they had to get a carpenter in a hurry, knocked out a window in one parlor, and installed a door.

Through brute determination, some business smarts, lots of work and luck, Durfee Bedsole and Odile Besseau, her French-born partner and roommate, pulled it off and opened The Taylor House,  “a country French restaurant with a southern accent” during Thanksgiving in 1991.

Traffic in the southeast coast through Marshall was so good for their restaurant, especially after rave reveiws in Southern Living Magazine and Dallas Morning News, that by 1993, “you couldn’t get in the door,” said Durfee Bedsole.

Six years after they started in 1997, they sold the restaurant, built a log home with their profits, and retired.

Now at the ages of 69 and 75 respectively, and living in Oregon, Odile Besseau and Durfee Bedsole and others like them mirror what experts in business creation have always known: entrepreneurship among the 50-plus is growing.  People like Franny Martin of Saugatuck, Michigan who, at 56 in 2002, started a successful cookie business (Cookies on Call) and couples in their 60s such as Brian and Shirley Loflin of Austin, Texas, who turned their love of nature into a publishing business and used a reverse mortgage to finance their capital equipment. Older-preneurship is gathering steam.

In 2005, 5.6 million workers 50 and older were self-employed, a 23 percent jump from 1990. The Small Business Administration (SBA) says Americans between 55 and 64 start small businesses at a higher rate than any other demographic. It is not a new event. A 2004 Kaufman Foundation survey said 18 percent of business founders were 55 years and older.

The numbers of potential older-preneurs are growing as baby-boomers flock into older adulthood. Census Bureau numbers say 50-plus Americans will rise by 31 million to 118 or 35 percent of the population by 2020, less than 10 years away.

The emerging boom in over-50 entrepreneurs is driven by factors such as the desire of older workers for autonomy and flexibility, worries about age discrimination, corporate layoffs that tend to affect older workers more, and access to cheaper technology. In time past, Franny Martin’s cookies would have been a local or regional business but, thanks to the Internet, she peddles her cookies worldwide.

Financing for many 50-plus entrepreneurs tend to come from cash from savings, family, severance packages, and loans from 401(k)s. As Bedsole and Besseau found out, banks shun entrepreneurs with no track record, as most 50-plus entrepreneurs tend to be. This is where reverse mortgages could come in.

Although they were conceived and designed to provide supplementary cash in retirement for cash-strapped but house-rich older adults and some reverse-mortgage purists might frown at even judicious alternative applications, reverse mortgages, as financing tools, have potential as sources of patient capital for older-preneurs, turning a time of non-productive consumption into a season of vast value creation for individuals and society. Here are six features of reverse mortgages that make them worth exploring as alternate financing vehicles for small businesses by older-preneurs.

1. There are generally no credit requirements, but lenders check credit reports for liens and issues that might affect title. Older-preneurs with weak or no credit histories have nothing to worry about. With FHA reverse mortgages, however, borrowers who owe U.S. government agencies money must show a good repayment plan before they can get FHA reverse mortgage.

2. Income is not a factor. Reverse mortgages are “pure” home equity loans.

3. Their interest rates tend to be lower than what a no-track-record entrepreneur can expect to get from a bank, so long-term cost of funds should be lower.

4. No monthly repayment is required; so older-preneurs have patient long-term capital that gets cheaper with time.

5. They are non-recourse loans, which mean the lender can only look to the home for repayment of debt, when the borrower moves, sells, or dies.

6. The debt has potential tax value for the older-preneurs.

While reverse mortgages have the potential to boost entrepreneurship as sources of patient startup capital among older business creators, it should not be used as a business-financing tool without informed counsel from reverse-mortgage-savvy accountants and lawyers.

Bedsole believes if they had had reverse capacity and access to reverse mortgage financing when they started The Taylor House, it would have been preferable to the costly credit card debts they used to get their restaurant off the ground. When given the choice between a reverse-mortgage and credit card financing for older entrepreneurs, my money is on reverse mortgages.

The far-reaching social and economic value of reverse mortgages makes it all the more necessary that Congress and HUD should work with industry to strengthen the FHA reverse mortgage program by halting principal limit cuts and reducing high insurance premiums to encourage demand.

“You don’t know where it is going to take you,” Bedsole said, “but when you see an opportunity, you seize it and make it work.”

She turns 76 in September.

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