While driving home, I heard a typical hyped up debt free commercial. The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices. First, live with relatives, who bought a home. However, did they have to get a loan to buy the house? Second, rent. Renting is not always a bad idea, just as homeownership is not always a good idea. Both scenarios have pros and cons. Third, buy a house. Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage. Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving 232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well. If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan. Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages. Mortgages have pitfalls as we all know, but provide benefits. The benefits are not just the ability to purchase property, but can increase wealth as well. Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

I tell clients all the time when starting a business, find the money first before signing any contracts. As much of a “no-brainer” as the previous statement seems, it happens.

I know people who paid rent for six months before getting the funding for their business. Fortunately, the time was only six months. Could you imagine being in a contract for three years at $1,500 per month without a business? You would be out $54,000!

Before getting the keys to the property, first do a business plan so see the feasibility of the project. Next, find the money.

When finding the money, where do you look?

As I’ve stated before in my article, “Why Small Businesses Can’t Get Loans”, only about 4% of money for start up business comes from banks. Some of the big banks (such as Bank of America as I am told) have blanket policies not to lend to start up business. Wells Fargo had an advertisement talking about new business owners having friends around in the beginning, but now the people are gone and Wells Fargo is there to help. Is this a way of Wells Fargo saying they don’t lend to start up businesses?

Some banks won’t make a commercial loan for under $200,000 as well.

When a bank doesn’t lend to start up businesses, this practice may be their policy; however, if the project is good enough, the bank can seek the backing of the SBA and still do the loan.

The SBA (partially) guarantees loans to bank. The idea is when a loan falls outside the banks normal lending practices and/or the client cannot get money elsewhere, the SBA comes in to help businesses get the funding. The SBA has been called “the lender of last resort”. Businesses do not deal directly with the SBA. However, the ultimate decision still rests upon the bank.

So where does the money come from?

55% – your savings

10% – relatives

7% – partners

6% – charge cards

4% – venture capitalist

3% – friends

3% – Angel investors

3% – mortgage property

5% – other

Now consider grant money.

Grant is money that does not have to be repaid.

Most grants however require matching funds meaning the recipient also has to come up with funds in addition to the grant money they are receiving.

Grants are usually available through public or private community foundations primarily granting monies to not-for-profit agencies and rarely, if ever, grant money to for-profit businesses. The grant money for small business may come in the form of assisting you with help and education, not direct funds.

WATCH OUT FOR GRANTS – some grant wording changes throughout the conditions to terms such as – grant – to loan – to equity position. In addition, to satisfy the conditions of a grant, you may have to spend the money received to do so, thus netting you no additional funds to operate.

When getting help from the government, there’s one thing you need to know right up front about getting money from the government…

They don’t have a single dime to directly lend to you for the start-up of a small business.

You may believe this statement to be untrue because of the way the term “government loan” is thrown around, and we hear about government loans all the time. (Refer back the the SBA. The bank is the SBA’s client, not the business.)

The bottom line is there is no direct money. But that’s okay…

If the government had to give money to any American who wanted to start a business, just imagine how much money they would have to collect in taxes to fund such a program.

Besides, a capitalist system works best when the government uses a hands-off approach with regards to the competitive market system. Having the government choose who gets funded and who doesn’t is socialism not capitalism.

Finally, getting a funding may not be as difficult as it sounds because money is out there. If you have a good plan, collateral, credit scores, etc., you can find money. However, be prepared to face rejection and get creative if you decide to follow your dream.

Getting money for a small business is not easy for many reasons.

First of all, owners and prospective owners need to cut through the sales hype.

Advertising my say the President has ordered banks to loan money to those who qualify, but in reality, the President can’t simply do such actions.

Banks have internal business practices and structures just as any other business operates. Did you know some banks won’t loan on start up businesses or until a business has operated for two years? Some banks won’t make commercial loans under $200,000. Not all banks or credit unions do commercial lending.

Not lending is not always a bad thing. When we put money in a savings account, for example, we want our money protected. In order for our money to be protected and safe, we should want to bank to make prudent lending decisions, not risky loans. Risk is more for investors and with the added risk, investors should reap the rewards knowing the potential losses could be great.

In addition, a bank or credit union has regulations to meet before a loan can be approved on top of their standard operating procedures. If a loan falls outside the lender’s normal business practices, or parameters, but wants to do the loan, the bank can seek the assistance of the SBA. The SBA has guidelines determining lending activities too.

Next, take secondary market issues. Many loans are sold on the secondary market. What may make lending difficult in the future, as we have seen in the past couple of years , is obviously related to people making money on investments. The market has been in the tank starting in 2007; therefore, no one wants to investing losing propositions.

Moving right along, consider taxes. In 2011, tax laws revert back to pre-2003 levels. Dividend rates will go back up to 39%! Higher taxes and less profits on investments may lead to lower values on investments due to lack of demand, thus people once again losing money.

Investments and dividends are not just for the wealthy or Wall Street execs, but also the average Joe’s IRA and 401k accounts, mutual funds, exchange traded funds, etc. (Check out my article, “Kissing retirement money goodbye“.)

So when looking for money, according information derived from the Small Business Development Center, only about 4% of the money for start up business comes from the bank – approximately 55%-65% comes from personal finances or relatives.

Other forms of money comes from selling assets, home equity loans, partners, investors, etc.

Grant money is for another topic, but basically there is not any grant money “for profit” businesses and the government isn’t a direct source of funding (or cash) for business, which is not a bad thing either; but I’ll go into this at a later time. In the meantime, consider what our taxes would be if the government provided loans to everyone.

In summary, the business idea and creating a business plan may take the least amount of time, but finding money could take months so be prepared and possibly be creative.