You feel stuck. Some days you wonder why you made the decision of going into the pawn business to begin with. A lack of additional funds keeps you from further building your pawn book and leads your customers to seek out one of your competitors. You have turned to banks for traditional financing only to be rejected time and again. Perhaps out of desperation you took out a Merchant Cash Advance only to learn afterwards that your APR is in excess of 100% and that daily deductions from your account are bleeding you dry.
Unfortunately, you are not alone. Despite dealing mostly in cash, pawn shops face an uphill battle when trying to get their hands on capital to grow their business. Conventional lenders understand little about the pawn business. And, those that do are wary of getting involved in such a cash dependent business.
There are several additional reasons why pawn shops are placed at a unique disadvantage when attempting to raise capital. Unlike other industries that are often dominated by large corporations, nearly 85% of all pawn shops are independently owned small businesses. Small businesses generally have a harder time obtaining financing than larger entities.
The pawn industry is one of the most heavily regulated consumer financial services in the United States. Despite providing an immeasurable benefit for American families needing quick access to cash, the pawn business is often cast in a negative light by them public. This is especially true following the Department of Justice’s recent initiative known as Operation Choke Point.
While it is true that the national average for redemptions is some 85 percent, pawn shops need to have the capital to float collateral loans until they are repaid. In addition, without the continued access to cash, pawn brokers will be unable to take on new customers and successfully scale their businesses.
The pawn industry is one of the most heavily regulated consumer financial services in the United States. Despite providing an immeasurable benefit for American families needing quick access to cash, the pawn business is often cast in a negative light by them public. This is especially true following the Department of Justice’s recent initiative known as Operation Choke Point.
As a result of Operation Choke Point, Banks simply sought to manage risk by cutting ties with businesses that deal heavily in cash. For pawn shops, cash is king. In fact, cash is by far the most important part of any pawnbroker’s operations.
Pawn or collateral loans are the core of a pawnbroker’s business. Lacking cash and access to conventional sources of financing, Americans frequently turn to pawn shops for short term loans.
While it is true that the national average for redemptions is some 85 percent, pawn shops need to have the capital to float collateral loans until they are repaid. In addition, without the continued access to cash, pawn brokers will be unable to take on new customers and successfully scale their businesses.
Pawn shops are heavily impacted by the seasonal and cyclical nature of the business. During peak times, pawnbrokers need to satisfy the increased demand of their clients. They need cash on hand to buy goods and other loans. Pawn shops lacking capital are placed at a significant competitive disadvantage to more heavily funded operations. As a pawn shop’s available funds decreases, its ability to make competitive others also decreases. As a result, customers are left to shop around for the best offer, taking the possibility of a nice profit with them.
A lack of conventional lending sources has led some pawnbrokers to turn to Merchant Cash Advance (“MCA”) companies for working capital. In its most primitive form, MCAs work by providing borrowers with a lump sum loan in exchange for a portion of future credit card sales or bank deposits. The loan is typically for a short period, like 3 to 6 months. Payments are usually taken by the MCA lender daily by directly deducting the funds from the pawnbroker’s bank account. By the time you are able to pay off the loan, your APR will likely be in excess of 100%.
Pawnbrokers that resort to Merchant Cash Advances often find themselves in a vicious debt cycle that can cripple their business. Daily deductions from sales can bleed a shop dry. Once the loan is repaid the broker is again in need of capital and often reups for another round of financing. And on the cycle goes with the pawnbroker unaware that whatever return on investment he or she is experiencing from a greater access to capital, it is likely being dwarfed by interest and fees on the MCA.
