Could pawnshops be a good alternative?
It's difficult to assess the degree to which small businesses have started to rely more on pawnshops, since the National Pawnbrokers Association doesn't collect data on the nature of their borrowers. But the industry has started to expand into financial services and higher loan amounts, with a burgeoning client base of people whose credit histories make them ineligible for traditional loan products or who don't have bank accounts at all. And a couple of outfits say they've noticed more small-scale enterprises turning to pawnshops when they need to bridge an immediate cash crunch.
"We're seeing a lot more high-dollar amount loans, and different types of people walking through the door," says Yigal Adato, co-owner of 10-year-old CashCo Pawn, which has three locations in California. "Before, we'd see people in a certain economic state. Now we're seeing a lot more people in suits, because they need to start their business, or extra money to close the deal."
Jordan Tabach-Bank is in the high-dollar pawn sector, with a shop in Beverly Hills that's served the entertainment industry since 1938. He recently opened a store in Manhattan, and says he's seeing more business loans there, as well.
"It used to be that people would get pawn loans to meet individual needs, like schooling or health care," he says. "We still cater to that, but lately we've seen more clientele who are small business owners, need a cash infusion and are fortunate to have a Rolex or diamond watch." That's prompted more interest in the pawn business, he says, but the nose-diving price of gold has taken the edge off growth -- when you can't resell bling for as much money, that cuts into your profits.
So, who are these borrowers exactly? Adato and Tabach-Bank don't talk much about the scrappy entrepreneur who needs help getting a business off the ground. For those people, there's still the Small Business Administration, which can help you out if you've got time to plan. Rather, it's the sole proprietor operating without much savings and not the best credit history who needs money fast, with no strings attached.
For example, Adato says that real estate brokers are struggling with low inventory and might need to bridge the time between making a sale and getting their commission. Tabach-Bank says that over the past couple weeks, he's helped one business owner who needed to cover Christmas bonuses for his staff and another who needed to stock up on inventory during the Christmas rush.
And then, there are the Wall Street types who may have lots of wealth in assets like art or boats, but not much liquidity. "You can't go into a local bank and say, 'Hey, I've got a margin call, you mind giving me a hundred grand real quick?'" Tabach-Bank says. "Our clients are people who have diamonds, watches, Picassos and Warhols, but might be a little short on cash."
The advantages of pawn loans over other forms of emergency lending are clear: They don't require a credit check, and unlike payday lenders, won't ding your credit score if you can't make the payments and have to give up your collateral. They're heavily regulated by states, which cap their interest rates between 2 percent and 20 percent per month. That's partly why they haven't attracted as much scrutiny from the Consumer Financial Protection Bureau, the three-year-old agency empowered to regulate non-banks, which has found that payday and deposit advance loans "trap borrowers in debt."
Earlier this year, professors from the U.S. Military Academy and Vanderbilt Law School chalked the lack of regulatory attention up to evidence that suggests that people use pawn loans more responsibly.
"Consumers seem to avoid making big financial mistakes when using pawnshops. Something about the use of personal items (and particularly sentimental personal items) as collateral may distinguish these loans from credit cards, payday loans, and the like in terms of borrowers’ repayment and default behavior," they wrote. "We view pawnshops as a potentially attractive alternative to other forms of high interest credit."
Most people manage the high interest payments. The National Pawnbrokers Association estimates an average repayment rate of 85 percent, and Tabach-Bank says that number is probably higher on business-related loans, since they tend to be investments that pay themselves back (rather than something like paying for gas to get to work, or diapers for your kid, or the electrical bill). But of course, the option is still far from ideal -- if you do want that piece of art or jewelry back, it's going to cost you more than a traditional loan, and there may be "service charges" built in up front, as well.
"Our view is, when lending is done without regard to a lender's ability to repay, that red flags should go up," says Ellen Schloemer, an executive vice president at the Center for Responsible Lending. "They don't care if I repay this, because they're going to make money off it one way or another. I think that people should be really careful."
Another option, for people with a little leeway, are credit unions and community banks, which have been more willing to work with small businesses than the big banks have been. If speed and convenience are a priority, there are worse ideas than pawnshops, as long as borrowers know what they're getting into.
"People should just recognize that they pay a cost for that," Schloemer says, "because it's going to be more expensive than other places."