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.