From Crains New York Dot Com
How to get small loans instantly
Some entrepreneurs are turning to pawn shops for financing. Here are some tips to follow.
When Carol Mortarotti needed money to hire a Web designer for her social media marketing firm recently, she found financing somewhere she might never have looked before the credit crunch: inside of her jewelry box.
Ms. Mortarotti, who has self-financed the Manhattan business she founded in 2008 after leaving a position at UBS in 2007, used about $1,100 worth of jewelry and watches that she didn’t wear as collateral for a loan from Pawngo, an online pawn shop. “I’m so thankful I found them,” said Ms. Mortarotti, who opted against redeeming her jewelry at the end of the loan and simply kept the cash.
Although banks stepped up Small Business Administration-backed lending in the past year because of higher loan guarantees, it remains difficult nationwide for entrepreneurs to get small loans. Some are now turning to pawn shops for financing, fueling growth at Internet-based pawn startups such as Pawngo, a Denver-area company that offers loans in the $1,000 to $1 million range. Officially launched in June, after a beta launch in 2009 under a different name, it now has venture capital backing by Daylight Partners, Access Partners and Lightbank, which was started by Groupon’s founders. The company says it has loaned more than $2.1 million in 46 states.
At Portsmouth, N.H.-based Pawntique, which launched in September and has about a dozen employees, CEO Don Battis, a former manufacturer, said that most of the customers are businesspeople. Pawn industry consultant Stephen Krupnik, a former pawnbroker and author of the book Pawnonomics, says that pawn shop lending to small businesses has gone on for years but that the economic situation may be fueling it now. “In other parts of the world, it’s a different story,” he said. “In China, it’s the No. 1 source of business credit.” While pawn shop loans in the United States average about $80, according to the National Pawnbrokers Association, Mr. Krupnik said it’s not uncommon for U.S.-based brick-and-mortar pawn shops that cater to small businesses to loan $5,000 to $20,000 or more, with dump trucks, cars and other vehicles as collateral.
Ms. Mortarotti raved about her experience in getting the cash she needed, but, as you might expect, borrowing from pawn shops requires some caution. Here are some tips.
Know how pawning works. When you pawn an item, a pawn shop will loan you a certain percentage of item’s value—say, 50% of what it would be worth if you sold it, explains Todd Hills, CEO of Pawngo. You’ll have the option to buy it back by repaying the principle, with interest. “In New York, the entrepreneur is going to pay 2% to 4% on his loan, depending on the size of his loan,” said Mr. Krupnik. Most loans last 30 to 60 days, during which the pawn shop is required by law to have possession of your jewelry or other collateral, says Mr. Krupnik. Sometimes, you’ll have the option to extend the loan after the initial term of the loan. While many pawn shops require monthly payments on your loan, not all do. Pawntique, for instance, doesn’t require you to make payments until after 3 months.
What happens if you can’t pay back the loan? The pawn shop will simply sell your valuables to cover the loan, says Mr. Hills. It won’t hurt your credit rating, says Mr. Krupnik.
Figure out if your valuables are pawnable. Pawn shops look for items that can be easily resold if you don’t reclaim them, such as items made from precious metals. “It is mostly jewelry,” said Mr. Hills, though he also buys luxury items such as watches and designer handbags. Mr. Battis said that when one small packaging company had to scramble to buy supplies to fill a larger order, he loaned the owner $20,000 against some Sterling silver flatwear. About 80% to 90% of customers redeem their goods, says Mr. Battis. “Most people really want their stuff back,” he said.
Consider how fast you need the money. The big advantage of using local brick-and-mortar pawn shops is that the transaction is almost instant. You can bring your item into the store and, after answering some questions about it and filling out paperwork, emerge with money in hand or wired to your bank account. Internet pawn shops such as Pawngo and Pawntique will ask you to email photos of your valuables for their appraisers to evaluate, and, if they pass muster, ask you to overnight them in a prepaid and insured courier pack. That means the speediest loans will arrive the next day.
Think hard about the interest rates. There’s a big downside to pawning: “It is expensive,” acknowledged Mr. Hills, who says it is intended as a short-term solution. Pawngo, for instance, charges 3% to 6% interest per month, with most of its loans lasting from three to six months. So, for instance, one trucking company owner who borrowed $15,000 from Pawngo to cover repairs for three of his trucks paid about $2,000 in interest on that loan over 4.5 months—effectively a little more than 13% of the principal. Then again, he points out, the company was losing money each day its trucks were sidelined. And Mr. Krupnik says the rates on larger pawn shop loans are “absolutely” negotiable.
Find the right pawn shop. According to Mr. Krupnik, many pawn shop owners have gemology or metallurgy degrees and are experienced at appraising valuables. However, it’s worth contacting more than one pawn shop if you’re looking for a loan. When Ms. Mortarotti asked local brick-and-mortar pawn shops what her valuables were worth, they offered her $50 to $100 for one of her watches. Googling for other options, she found Pawngo—and got a $650 loan on the same watch. Also make sure that before you do a deal, the pawn shop owner is licensed, says Mr. Krupnik. Locally, that’s done by the New York Department of Consumer Affairs.
Consider your need for privacy. Internet shops may be a better bet than brick-and-mortar shops if you don’t want members of the community to see you pawning your belongings or are worried about frequenting a local pawn shop in a high-crime area. “It’s much safer than walking the streets of New York with your valuables,” said Mr. Hills.
But borrowing from pawn shops isn’t completely under the radar screen. The pawn industry is heavily regulated by federal and state laws. Pawn shops are required to report their transactions to local law enforcement agencies—along with personal information such as your address—and file forms with the IRS when an individual loan or series of cumulative loans exceeds $10,000, said Mr. Krupnik. That means, for tax purposes, you’ll have to keep just as careful records as you would if you walked into your local bank and got a loan.
Entire contents ©2011 Crain Communications Inc.