The Bay Area has long been known as a hub of venture capital.
But a new provider of business financing has emerged, reports Mark Calvey in the San Francisco Business Times: the pawnshop.
One particular shop, called San Francisco Provident Loan Association, has lent one entrepreneur $1 million and is in the midst of assessing a $2 million request. As you can tell by these totals, this is serious lending--and a far cry from the lower sums stereotypically associated with pawning.
"This isn't your grandfather's pawnshop, lending against power tools," is what Joey Chait, whose family has owned Provident for four generations, told Calvey. He reports that although Provident has, indeed, made loans against the expected valuables--jewelry, diamonds, watches--the list, for larger loans, includes fine art, antiques, classic cars, wine collections, and other collectibles.
The New Breed of Pawnshop
Provident is not the only pawnshop practicing serious small-business lending. Late last year, The Wall Street Journal profiled pawnshops as part of its "Shadow Lending" series. Here's one scenario:
When Heather Robinson needed money to start a sports-apparel line, she turned to an unusual lender, offering a prized possession as collateral: a bronze nude torso sculpture.
Ms. Robinson, who directs a Washington nonprofit, brought the 16-inch statue last month to a New York firm called Borro Inc., which immediately wired her $15,000. The interest rate: 3.99% a month, or as much as 23.9% for the six-month loan term. Borro and other collateral lenders--essentially high-end pawnshops--are a small but fast-expanding part of the shadow-lending system. Since 2008, as commercial banks have cut lending to small businesses, such alternative lenders have helped fill the void.
Borro, as it happens, has lent nearly $100 million since 2009. Its competitors include Pawngo, a Denver-based shop that's raised $3 million in venture capital, and iPawn, based in Tyler, Texas, and founded by a former Lehman Brothers banker.
The State of Small-Business Lending
Before you get too excited about the capital at your fingertips, remember: There are high interest rates in play here, as Robinson's example with Borro points out. That typed, there's plenty of evidence that entrepreneurs and aspirants are happy to pay high rates for quick cash. Popular alternative lending services such as OnDeck and CAN Capital charge annualized interest rates as high as 134 percent.
Moreover, as OnDeck executive Andrea Gellert recently told Patrick Clark in Bloomberg Businessweek, for entrepreneurs, interest rates are often nothing but opportunity costs. Gellert posited a hypothetical business owner who has a limited amount of time to buy discounted inventory--and borrows money at a 54 percent APR to buy that inventory. "If I buy that inventory for a dollar and sell that inventory for $2 in a six-month period, that's a 200 percent return. So my 54 percent cost makes absolute sense," she said. "I will make that tradeoff every single time."
Though Gellert's argument makes sense when viewed through an optimistic, entrepreneurial lens, the fact remains that 54 percent APR is still high, compared with what you can get from most credit cards--and certainly what you can get from banks. The problem, of course, is getting a loan from a bank. A 2014 survey by the Institute for Local Self-Reliance revealed that 42 percent of local businesses needing a loan in the previous two years had been unable to obtain one. This was no small survey. It included 2,602 companies nationwide.
Perhaps, then, the recent news that Jack Dorsey's Square is entering the arena of small-business lending is no surprise. Though there are signs lending is on the rise, obtaining an old-school bank loan still remains a difficult chore for mom-and-pop, Main Street businesses.
This much is clear: Business owners are, as always, hungry for hassle-free cash--even at a high price. With the emergence of pawnshops as a source of financing, they now have one more place to turn to.