Small Business Owners Using Pawnshops to Make Payroll

One of the reasons the economy continues to be mired in high unemployment is the lack of hiring by small businesses, which have been the engine of job growth in the US for the last decade. In the last expansion, the largest companies shed jobs, and that trend has gotten only worse as a result of the crisis. Not only are giants like Cisco cutting headcounts, but the heretofore-insulated-from-bad-things-by-your-tax-dollars big banks are following suit. And not surprisingly, recent surveys of new businesses show they remain cautious about hiring.

Needless to say, if companies can’t afford to hang on to the staff they have, that certainly isn’t a plus for the economy. The use of pawn shops by small enterprises to make ends meet is likely to be one step before the end of the rope.

Many small businesses make use of credit to finance inventory or to cover short term funding needs. Credit cards are a major source of financing to small companies who are not big enough or long enough established to qualify for business loans.

Small businesses took it on the chin early in the downturn as credit card companies slashed credit lines on credit cards in an indiscriminate manner (many cut everyone in zip codes that showed large housing price declines; Advanta, which was focuses solely on small business, failed; American Express dropped its two credit line products aimed at business owners). As the recession continues, a sign of continued distress is the use of pawn shops, the traditional banks to the least bank-worthy, to help these enterprises make payroll.

I wonder if a culprit is delays in getting paid. I’m seeing that happen in my space. The big ad agencies are dickering over invoices from publishers to a previously unheard-of degree and will hold up an entire payment, which consists of many items (different ad placements from different advertisers) over a single item they’ve decided to question. In addition, some have also formally gone to 90 day payment. I am told this is not driven by the advertisers but is an effort by the agencies to improve their own cash flow.

From CNN Money (hat tip reader Valissa):

Squeezed by tight credit and tempted by record high gold prices, small business owners are finding an alternative to the bank: the pawn shop.

More than half of the customers at online pawn shop, Pawngo, are small business owners, said Todd Hills, CEO of the Denver-based company.

“These guys can’t wait. They have businesses. They have employees they need to pay,” said Hills, who launched Pawngo in June. “This is a great way to solve a short-term need.”..

With pawning, there are no applications, credit checks or dings to the credit report if the customer defaults on the loan. “You can still bring your stack of papers into the bank, it doesn’t guarantee you will get a loan,” said Hills.

While individual consumers may walk into a pawn shop with a couple hundred dollars worth of jewelry looking for cash to fill up the gas tank or the refrigerator, small business owners tend to come in with more expensive items, said Ray Shaffman, a salesman at Gables Pawn and Jewelry in Miami.

Gables Pawn and Jewelry has seen customers come in with watches made by Rolex, Cartier and Patek Philippe. It pays between $5,000 and $10,000 each for them, said Shaffman.

“To make payroll is the number one reason” small business owners come to the shop, said Shaffman. “They don’t have enough flow, enough cash, to pay their employees. And they got to pay their employees. Otherwise, they have much more complicated problems.”

I wish I knew the terms of these loans. I would assume the interest rates are extortionate and the loans are overcollateralized by a large margin. This is a high touch form of lending, so the charges, both explicit and hidden, have to cover the transaction costs.

In general, going to the pawn shop is a desperate measure, and seeing it depicted by CNN as not unusual among small business owners is another sign of the severity of our economic woes.

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  1. Psychoanalystus

    This is clearly an opportunity we shouldn’t let get away. As such, I urge all pawn shop owners to utilize the fantastic tools available at the link below. For example, make sure that you use the “Working Poor Locator” and “Racial Profiling Tool” to track down all of your potential victims (many of them small businesspeople), and squeeze the last dollar out of them.

    1. psychohistorian

      Hey psychoanalystus, (tongue in cheek)

      We need help from your profession designing an even sicker society than the one we find ourselves in today. Come on now, challenge yourself and your profession and give those global inherited rich some more strategies to sicken, damage and otherwise ruin our society.

      And it needs to happen faster….


      1. Psychoanalystus

        I am right here, my friend, at your service :)

        To begin with, to make this a better world, we really need to start using more drugs (legal and illegal). We also need more entertainment and reality television programming. And we need to cut Medicare, dammit!

        1. No Know

          “Bread and Circuses”
          Juvenal, circa AD 100

          “Drugs and TV”
          Psychoanalystus, AD 2011

          Now that’s progress!

  2. vlade

    It’s interesting, as the more usual way of getting paid was talking to a factoring/invoice/account receivable purchaser (which is really just a different way of pawning, but…).

    I’d like to find more how that part of the business world is performing now.

    1. Yves Smith Post author

      True but factoring was usually for a bigger transaction sizes, and the terms were pretty standardized (IIRC, in the old days, the discounts were 15-20%, which sounds pretty bad, except retail has this weird concept of markdown money, which means a sale is not really a sale, so if factoring shifted the markdown money risk to the factor, that is worth a ton).

      Long winded way of saying I think the terms were less bad. Would welcome reader input on this one.

      1. vlade

        Agree (although these days you can get factoring even for relatively small businesses, as long as you sign a long-term deal to run all invoices through it). That was why I would like to know more about this, because if people are pawning rather than factoring that means there’s likely also a sizeable problem with the supply chain credibility/timing – or even worse, you have no invoices to factor. All of this would indicate that if the pawning is truly widespread, good chunk of small businesses are in terminal stage (which I think is the point of your article).

        1. No Know

          The economy is moving more and more underground, and this is a sign. No one goes to a pawn shop when there is an alternative.

  3. appointmetotheboard

    Interestingly (perhaps) yesterday when Bob Diamond, CEO of Barclays, was announcing £2.6bn of profit and job cuts to boost said profit, he also gave his thoughts as to why UK small businesses weren’t borrowing money – a lack of confidence in the economy.

    Now, that might need to be taken with a pinch of salt. The banks don’t want to lend money to small businesses. Nonetheless, the “confidence” that comes from a Government slashing spending and squeezing incomes doesn’t seem to have materialised.

    America beware of what austerity can do for the economy.

    1. Yves Smith Post author

      I do think confidence is the bigger issue (in general) but it isn’t really separate from the availability of funds. If funding is scarce, it induces much more caution.

      1. appointmetotheboard

        You’re right, confidence is the bigger issue.

        But we’ve got politicians on both sides of the Atlantic telling us that business confidence will surge in the knowledge that budget deficits are being tackled. And it isn’t. This is just one indicator that, “expansionary austerity” is a nonsense.

    2. John L

      Since banks have tightened their rules on who and how much they will loan to, I’m not surprised that small businesses are getting desperate enough to go to pawn shops. Many small businesses borrow to make payroll, and pay back the loan at the end of the month with receipts they collected. To a big bank, that’s a default just waiting to happen, so they have stopped loaning out money to them (and to just about everyone else too).

      If you’re a small business owner and can’t get loans from reliable banks, then you’re going to be cautious about hiring more people. No jobs being created, existing jobs at risk, so consumers don’t spend either. That leaves the government to inject money into the economy, but wait; they’ve decided not to do that too. Who’s going to be the first to blink?

      1. TC

        In the chasm between “banks [that] have tightened their rules on who and how much they will loan to,” and pawn shops, there rather vividly appears an insolvent banking system. I mean you would think there would be one mega bank supposedly employing the best and brightest that could figure out some way to undercut pawn shops, wouldn’t you? They’re bust and should be called out. I’ve been on a jihad over at twitter saying so much to congressional representatives (both House and Senate) who actively use that service. This principally in promoting HR 1489 — “Return to Prudent Banking Act of 2011” — but appropriately slamming the jerks on other related fronts, as well. Good fun. You should join me.

  4. LAS

    Banks WILL lend to small business providing that the officers and executives offer their homes up to back the loan. At our company, we considered this and rejected it. If we had a really optimistic business outlook our decision might have been different. Maybe someone with a hot idea has that level of optimism.

    Banks enable you to take risks. The risk is always assumed by others: investors, depositors, taxpayers, borrowers. Banks are always in the middle, but they are never the bagholder. And, IMO, it is just that simple underneath the complexity.

    Re securitization and financial crisis, one might almost say banks have assumed huge legal risks. But they’re so invested in controlling the political/legal environment, perhaps they’re not at legal risk.

  5. Mike

    Yves, Pawn brokering explained by Rick Harrison of Pawn Stars on History. Every Pawn is done with a penalty interest rate, but this rate seems to be aligned with the risk that is being taken. The Rate is 10% per month with a $5 per month storage fee and a maximum term of 120 days. After that 120 days you forfeit your collateral. I would argue that this is a much more clearly defined transaction than any “Bank” loan ever was and probably better regulated.

    1. lambert strether

      Better a pawnshop than a bankster. At least pawnshop owners are (mostly) local and not thieves. And, as Mike points out, they’re regulated and the deal is clear.

    2. Valissa

      That was a fascinating interview, thanks for the link! I’m not much on reality shows, but I really do like Pawn Stars. My husband TiVos it.

      When I was around 21 and living for a brief period on the Florida coast taking a break from college, I pawned a really nice gold bracelet in between paychecks. Normally I was very good on a tight budget, but I had this wastoid beach bum boyfriend who wasn’t (and yes I dumped him after that!). I got the bracelet back after a few weeks, and remember the guy at the pawn shop as being nice and friendly.

  6. alex

    “Not only are giants like Cisco cutting headcounts, but the heretofore-insulated-from-bad-things-by-your-tax-dollars big banks are following suit.”

    But those are very different from small businesses. I doubt small business owners are going to pawn shops just for a small tweak in already good profits. Cisco and the banks are profitable and just want to squeeze a bit more.

    This relates to yesterday’s H-1B post too. If in a year or two business picks up and Cisco needs to hire, what do you want to bet they’ll scream “tech worker shortage”! Of course they’ll have a shortage – they laid off lots of good experienced people. Once upon a time without the H-1B and offshoring scams (and possibly even looking more than 2 quarters ahead) companies would hang on to good people because they knew they’d be needed when business picked up. How quaint.

    I’ve always been sympathetic to the argument that it shouldn’t be too hard to lay off people because then companies would be reluctant to hire in the first place. And as tough as it is it’s better to have layoffs than go out of business. But this is different. There should be restrictions, especially in times like these, from profitable companies (sitting on hoards of cash) laying off people. And don’t forget to double the penalties and require a shareholder vote if there’s any increase in executive compensation to go along with the layoffs.

  7. Mannwich

    I was thinking Wall Street should get in on this action but then thought that this line of business is too honest for them.

  8. ep3

    maybe the small business owner shouldn’t have been wearing a rolex while struggling to make payroll.
    I saw too many business owners turn into big shots because they started their own business.
    Part of the reason is the tax rate laws. Now we know the tax rates are messed up in this country. But what is quite common is to lower profits for the company as low as the bank would go. The rest of earnings are taken out at a lower personal tax rate in the form of rents, bonuses, vehicle purchases for “business use”. Regardless of how low the marginal rates are, the corporate tax rate is still 35%. So the objective is to reduce that taxable number as low as possible.
    But at the same time yves, we have business owners that are encouraged to extract all the wealth and value from a company and then complain because cash flow is low and then employees don’t get paid or get raises. So the business owner borrows thousands of dollars just to pay the bills and as deflation continues to erode margins, all of a sudden the business is leveraged to the hilt and then something like 2008 hits and boom, the doors close and everyone is unemployed.
    I just think it’s more fundamental than what you have laid out here.

    1. No Know

      ep3 provides an insightful view of small businesses that is mostly missing from the discussion of small businesses, because of too little actual practical knowledge. From my own experience, small business owners typically greatly increase deductions and take considerable income “off the books” in order to minimize their income taxes. (Like Archie Bunker once said: “I ain’t like your big corporations that can run down to H&R Block every time I got a question”) With little professional input, they act as their own in-house tax counsel. In flush times, bankers will look at their reported income and factor in that there is much more than meets the eye (small businessmen usually rely heavily on their tax returns to document income). Now that the shit hit the fan, there is no room for that kind of discretion, so the under reported income becomes the basis for any loan (or actually loan denial). Trust me, from experience, the vast majority of small business owners will only report a fraction of their true income (although they’re not anywhere near Greek doctors). Sad to say, it is very difficult to solve a problem when there is such a vast difference between what academics and policy makers believe is the case and what goes on in the real world. Like Jack Nicholson said, “You want the truth, you can’t handle the truth.”

    2. Yves Smith Post author

      I suspect a fair number of the small businessmen in this sample (with Rolexes) were guys who once had decent paying jobs (you could make several hundred thousand as a senior manager just below C level in most major corps until the early 2000, the headcount and salary cutting in this cohort got serious per my reports from McKinsey and ex McKinsey types). There are a ton of people in their 40s and 50s unemployed and underemployed before the crisis. Some of them retired on a modest living, some of them “consult” (which is really low overhead), some started businesses. Long winded way of saying they bought their Rolexes before they went into business for themselves, not after.

      One big exception is the jewelry trade itself. The diamond district has been bleeding for the last ten years. I’ve heard stories of third generation diamond dealers going out of business, and very successful dealers in estate jewelers (as in super high end clientele, the sort you think would be insulated) seeing their businesses implode. Serious jewelry was very fashionable in the 1980s, it isn’t a used as status marker right now (save, amusingly, men’s watches).

  9. John

    Since the system uses us for itself, it’s only fair to
    use the system against itself.

    Utility bills,
    payments to government, payments to any large
    corporation, should all be done by point-earning,
    no-fee credit cards at the last minute to avoid
    interest and late penalties.
    The credit cards should be also paid off in full
    at the last interest free minute.

    Go to the bank and get cash to pay all small
    merchants, workers, restaurants and mom and pop
    businesses, even if a small corporation.

    1. R Foreman

      Ah screw it, just walk away from your mortgage and stop paying your taxes. In fact stop paying on all your loans. If everyone did that all at once our politicians would find god very quickly I think.

  10. Suvikas

    I don’t understand it. Where is the anger in the public when you hear these stories? This is not a Banana republic where such things happen. This is the US of A.
    Or maybe people need to see the conditions in those kinds of countries, to truly appreciate what you have. Maybe you need to see what you are in danger of losing, to encourage you to fight the corrupt system that is eating it away.

    1. toxymoron

      I think you’ll need to find new words. “Fifth world” perhaps, or “citrus republic” (because everything is grim).
      From where I live, ‘Living hell’ seems most apt to me.
      Good luck to all of you.

      Liz for Prez (and Yves for vice).

  11. buermann

    Looks like 3 to 6 percent interest a month and 1 to 4 on the collateral:

    Mark Lancaster, of Dallas, mailed in a stainless and gold Rolex worth about $3,800 for a $1,000 loan. He said he had never pawned anything before but needed the money to pay bills.

    “Three days later, I had the money in my account,” he said. “When you need the money to make yourself survive and keep going, you do things you wouldn’t think you’d have to do.”

    He is paying 6 percent interest per month — or $60 per month.

  12. Pragmatic Realist

    Once upon a time you dressed so fine
    You threw the bums a dime in your prime, didn’t you ?
    People’d call, say, “Beware doll, you’re bound to fall”
    You thought they were all kiddin’ you
    You used to laugh about
    Everybody that was hangin’ out
    Now you don’t talk so loud
    Now you don’t seem so proud
    About having to be scrounging for your next meal.

    How does it feel
    How does it feel
    To be without a home
    Like a complete unknown
    Like a rolling stone ?

    Bob Dylan 1965

    Be careful who you step on as you go up, because you will be meeting them again on the way down.

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