We are first-time buyers for a small gift store in a small town. We financed the store with a local bank two years ago with a balloon payment which was due November 14, 2005. We have always made our payments on time. The first time we signed papers, we told them that we did not want to use our home as equity, so there were no papers drawn up for the home.

Now, that they are re-mortgaging our business, they want to use our home as collateral. We keep telling them, NO! They didn't do it the first time, so why do they want to do it this time? We owe approximately $8,000 less now and our payments have always been on time.

I'm getting really stressed out over this and just want them to take the business back or try to sell it. What are my options? We've invested over $30,00 more in inventory and owe approximately $23,000 on one credit card.

We bought the business for $215,000 with $20,000 down. So we financed, $195,000 and now owe $187,000. The interest rate was 6.5 plus 1 and is now 8%.

Please answer as soon as possible. Thank you,
email: Krumreyk@chartermi.net

Are we talking real estate here?

Why the short balloon?

What is the market value of the property if we are talking real estate?

How are you making your payments? Is the business making enough money to make the payments or are you putting in your personal cash flow? The fact that you are willing to let them take the business sounds as if business is not really that good. It could be that the lender is looking at the numbers and has detected a weakness that it wants to mitigate

Technically, you can be declared on default because of the balloon payment.

It's hard to definitively say why they insist on securing your home as well. It could be becuase of declining revenues, declining cash flow, credit property condition/value etc.

One thing does come to mind. You say you bought the business with only $20,000. That's roughly 10% based in the sales price. Banks generally do not finance 90% unless they have an SBA guarantee for a portion of the loan amount. If the SBA loan is ballooned, you cannot refinance with another SBA loan. That would mean the bank would have to provide the entire financing for 87% ($187,000/$215,000) with no SBA guarantee. Banks very rarely go that high. Their max is usually 75-80%. They may want to secure your home to make the LTV in line with the acceptable risk guidelines.

If you just let the bank take the business back it will show up as a foreclosure on your credit. You could try to sell it but that can take a while. The bank may then begin foreclosure proceedings. You can ask the bank for an extension on the current loan so that you have time to sell, or refinance using your home as additional collateral then sell the business freeing up your home again.

As far as rates, they have gone up for everyone.