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Should You Consider Going to a Pawnshop for a Small Business Loan?

July 21, 2014
Small Business
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Getting a small business loan is often one of the most difficult parts of turning a great idea into a profitable enterprise. This is especially true if you don’t have a good credit score or a significant asset to put up as collateral on the loan.

Historically, pawnshops provided loans to individuals who were having trouble getting traditional financing. But now they’re turning their attention to small business owners facing the same difficulties. Should you consider this option for your fledgling company? Take a look at the details below to decide for yourself.

Opting for a pawnshop loan sounds like a good idea

If you’re unfamiliar with how pawnshop financing works, the structure of the loan works like this: You bring a valuable item into a pawnshop and the owner assesses its worth. He or she will then lend you money based on a portion of the item’s value; for example, if you bring in an antique worth $500, the owner might be willing to give you a loan for $300.

Then the owner holds on to the item until you’ve repaid your loan – with interest, of course (see below). If you don’t pay on your loan, the owner will simply keep the item you pawned and sell it to recoup his or her losses.

It’s easy to see why pawnshop financing would be attractive to small business owners:

  • Most loans are made immediately; there’s no waiting for weeks on a lending decision.
  • Loans can be for almost any amount; if you pawn an item of very high value, you could end up with serious cash in your pocket.
  • No credit check is necessary; this makes qualifying for a loan easy.

A 2014 article in the San Francisco Business Times profiled a local pawnshop called Provident Loan Associates. From the piece:

“While there are no figures that track how many small businesses turn to pawn shops for cash, Provident is among the growing number of pawn shops lending to small business owners and entrepreneurs. … In at least one case, Provident has lent money to a tech startup just getting off the ground.”

Clearly, the small business and startup communities find pawn financing increasingly attractive – but what’s the catch?

But using a pawnshop to get a loan for your small business comes at a price

Many pawnshops have increased their respectability in recent years, but there’s still a major drawback to their loan products that can’t be ignored: the interest rates.

Most (but not all) states regulate the interest rates charged by pawnshops and keep interest rates at or below 5% per month. But at 5% per month, the APR on a pawn loan works out to 60%. Most small business loans charge an APR of roughly 7-8% as of June 2014, so you’re paying a very high price if you opt for the convenience of a pawn loan.

Another consideration is that all pawn loans must be secured by a valuable item. If you don’t own expensive jewelry, artwork or anything else that would fetch a loan amount high enough to meet your business’s needs, you’re out of luck.

You don’t have to resort to pawnshops to get financing

Although it may seem impossible, you can get a loan for your small business without resorting to a pawnshop. Here are three cost-effective alternative financing ideas if you haven’t had success with traditional banks:

Peer-to-peer lending – Many popular peer-to-peer lending sites have begun expanding their products to small business owners. For example, Lending Club now offers business loans of up to $100,000 at as low as 5.9%. Plus, the online application is much simpler than that of a conventional bank’s.

Grants from your state – While the Small Business Administration (SBA) doesn’t provide grants directly to entrepreneurs for the purpose of starting or expanding a business, you might be able to get a grant from your state. Your odds are especially good if your venture provides some kind of public service.

Crowdfunding – Crowdfunding has exploded in popularity in recent years, and it’s a good option for people with ideas that are likely to get a lot of online attention. While Kickstarter is probably the best-known crowdfunding site, others, like Fundable, are specifically for raising capital for small businesses.

Although you’ll have to pay a portion of the funds you raised to the site (and possibly some other fees), crowdfunding is a good option because it’s not a traditional loan. You typically won’t have to worry about paying money back.

The takeaway: Although using a pawnshop to get a small business loan might seem like a good idea, there are alternatives out there that are much less costly. Be sure to explore all of your options!

Small business owner crunching numbers image via Shutterstock