High-end pawn shops solve small business cash crunch
CHICAGO (Reuters) - When Marc Kaye needed a loan to fund his boutique insurance firm at a time when payroll, his kids' college tuition and a mortgage payment were all draining his cash reserves, he didn't go to a bank.
Instead, he pulled a 1940s Picasso pencil drawing off his living room wall and made an appointment with Borro (borro.com), a high-end pawnbroker. Borro did not require mounds of paperwork, did not care about his credit rating and did not put him through the third degree over how the money would be used.
"I needed some immediate cash," says Kaye, who quickly got a six-month loan of $39,500, agreeing to a monthly interest rate of 3 percent plus about $175 in processing fees. "I had never pawned anything before."
Kaye, based in New York, represents the type of upscale customer that those in the pawn broking industry say is becoming more prevalent - a small business owner facing a cash crunch. To serve this clientele, a specialized niche of pawnbrokers is gaining traction, defying the industry's reputation as the lenders of last resort.
Some offer in-person services in well-appointed offices, while others give customers the privacy of secure transactions over the Internet. The segment is developing at a time when the industry is pushing up-market, with big national chains such as EZPawn attempting to polish their reputations with the expansion of clean, well-lit stores.
Borro, the service selected by Kaye, is somewhat of a hybrid, with a website that lets would-be borrowers make initial contact and office space to meet in-person for asset evaluations.
"We just call it online personal asset lending," says Paul Aitken, Borro's chief executive officer, who founded the company in 2008 in London and opened a New York office in February 2012.
Borro's customers take loans against fine jewelry, wine collections and other valuables. The company, whose average loan is $15,000, has backed everything from a Formula 1 racecar to a Beatles record contract.
The business attracts customers through its website as well as referrals from private banks. Couriers typically pick up items and deliver them to Borro's offices, where appraisers validate their worth. There are phone calls and sometimes face-to-face meetings, depending on the circumstances. Money is then wired to the customer's account, with the entire process taking just a few days.
"The bigger the customer, the more high-touch it is," Aitken says.
Most borrowers, he says, will extend the terms of their loans rather than forfeit merchandise, and many come back to use the service again. Backed by $40 million in venture capital, Borro's loan volume has doubled each year, with small businesses now accounting for 60 of every 100 dollars loaned.
At Beverly Loan Co., a brick-and-mortar pawn business outside Los Angeles that has catered to the wealthy for 75 years, business is also brisk, and small business customers are on the rise, says owner Jordan Tabach-Bank.
To meet demand for loans ranging from a few thousand dollars to $1 million, he opened a second office in the New York City's International Gem Tower; it offers well-heeled customers secure storage for everything from GIA-certified diamonds to Patek Philippe watches.
As the economy has slowly improved, Tabach-Bank says, clients are taking out loans to start new ventures, to cover larger payrolls or to meet inventory demand for products moving off shelves more quickly than expected.
"Pawn is becoming more mainstream," says Tabach-Bank, who has appeared on Discovery Channel's antique dealer series "Final Offer." "There are pawn-based TV shows, they're talking about pawn, people are feeling more comfortable."
But there is still an overhanging industry stigma, which is one reason for the popularity of online pawn broking sites such as Tyler, Texas-based iPawn (iPawn.com). iPawn's transactions are strictly web-based, and customers receive an initial valuation of their merchandise by sending a photo.
If customers want to proceed with the process, the company obtains their valuables via a secure FedEx transaction. Once given a final offer, consumers can either take a loan or sell the asset outright.
"None of would go to a brick-and-mortar pawn shop," says Ben De-Kalo, CEO of iPawn, which was founded in late 2011. In less than a year, loans to small business owners have increased to 50 percent from 20 percent of all the firm's loans.
VARYING DEGREES OF COMFORT
Pawn-broking terms can vary considerably by jurisdiction, with interest rates typically higher than those on bank loans. Each state has its own regulations determining licensing, registration, reporting, records and related information.
The industry also adheres to federal regulations, including the USA Patriot Act, which requires loan customers to prove identity; the Truth in Lending Act, which calls for pawnbrokers to define the terms of the loan clearly; and Federal Trade Commission rules, to safeguard consumers' personal information, as well as other statutes.
Customers should be wary of pawnbrokers that undervalue their assets and should scrutinize the covenants of any pawn loan, says Rohit Arora, CEO of Biz2Credit (biz2credit.com), an online platform that offers a variety of financing options and consulting to small businesses.
Kaye, the New York-based entrepreneur, said he would not hesitate to would take another loan with a high-end pawnbroker.
"I felt very comfortable with the process," he said, assuring a reporter that his precious Picasso was once again hanging on his living room wall.
(The author is a Reuters contributor. The opinions expressed are her own.)