Pawn shops: As recession deepens, cash-for-goods outlets become alternative to banks

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Hy’s Pawn and Jewelry, co-owned by Cindy Amberger, is preparing to launch a new micro-lending service, partly in response to increased numbers of business owners seeking short-term loans.

As is often the case during a recession, Twin Cities pawnbrokers have been seeing increased customer traffic in recent months. But not all of those customers are cash-strapped individuals seeking a small loan to pay the rent or buy groceries.

In today’s sluggish economy, pawnshop owners say they’re increasingly functioning as the operators of de facto micro-banks, making a business of providing short-term loans to small-business owners who are coping with tightened bank credit, slow-to-pay creditors and other cash-flow problems.

Within the past year or so, Minnetonka-based Cash ‘n’ Pawn has seen an estimated 300 percent increase in loans of more than $5,000, according to operations manager Barbara Fasching.

“In this economy, a lot of small contractors have had trouble getting paid,” Fasching said, noting that her firm has provided business owners with short-term loans of up to $150,000, based on collateral such as trucks, excavators or other large construction equipment.

Providing the space needed to store such large items increases operating costs, but “we have to be open to what will increase our business,” Fasching said.

Thanks to the downturn, Fasching said, “We’ve seen a whole new customer base exploring and finally realizing what the pawn industry offers. We’re kind of a ‘simple bank’ — you bring in a TV and you can get a loan in five minutes with no credit check or credit score.”

Cash ‘n’ Pawn offers borrowers a slightly lower interest rate than most of its competitors, she said. If a borrower returns to pay back part or all of the loan within the first two weeks “we discount by half of the monthly (interest) charge. A $100 loan will cost you $125, including the fee. We will only charge you $112 (total) if you come back to make a payment in the first two weeks.”

In 2000, Minnesota’s largest pawnbroker, Pawn America, launched its Payday America subsidiary, structured to offer short-term, “payday” loans at a more attractive fees than most payday lenders, who typically charge fees of 15-30 percent, per pay period. Payday America charges about 9 percent, according to founder and CEO Brad Rixmann.

For more traditional pawn loans, the firm’s average is about $130 to $150, although it has made a few loans of around $50,000 to small business owners seeking a quick capital infusion. While smaller loans cost the borrowers about 20 percent per month, monthly interest charges drop to about 10 percent for a $1,000 loan, and 7 percent for loans of $5,000 or more, Rixmann said.

In 2005, Payday America obtained a Chapter 53 Industrial Loan & Thrift Lending License, enabling it to function more as a mini-bank. The license allows Payday America to offer more consumer loans, debit cards, mortgages and check-cashing services.

Rixmann has also been seeing more small-business owners seeking loans.

“We fill a niche which is very necessary, providing micro-loans. You can walk in and borrow $5 to $50,000 per month in less than an hour or two.” Rixmann said only about 1 percent of the money his company loans is lost to customer defaults.

Rixmann said he can empathize with his cash-strapped, small-business customers: “We recently wanted to expand our own line of credit, but our bank is just not lending money. And, even in a good economy, many people can’t go to the bank and borrow $5,000 quickly.”

Minneapolis-based Hy’s Pawn and Jewelry is preparing to launch a new micro-lending service, according to co-owner Cindy Amberger, whose grandfather, Hy Rosen, started the business in 1934.

“About a year or year and half ago we started to see tiny signs of it – more small business owners, especially in the trades, needing to make payroll, maybe waiting on a check for a job,” Amberger noted. “Those are usually higher-dollar loans; they may be trying to cover their next payroll.

“Banks have been pulling back credit-lines, and people have to access the money somwhere.”

While the loan default rate increases in tough economic times, making judicious lending decisions is one way to reduce that factor, Amberger said: “Hopefully, we have made good loans to begin with.”

Regarding the business for which pawn shops are more commonly known, Amberger said she hasn’t noticed an increase in middle- and upper-income people selling their possessions to Hy’s.

“We’ve always had the business executive from Wayzata coming in to pawn his Rolex. That’s not new. But we can tell that lower-income people are really scraping – sitting at home thinking about what they might be able to sell.”

What Amberger has seen an increase in during recent months is requests for loan extensions or interest rate adjustments, which Hy’s sometimes extends to regular customers.

“Regular customers do receive special rates because we have known them for so long, and see how the economy has impacted them,” she explained.

As a relatively small operation, Xcel Pawn in Maplewood doesn’t have room to store trucks or other large construction equipment. But it has seen “a huge increase” in small contractors and other tradespeople coming in to pawn power hand-tools such as saws, drills, sanders and other items, according to store manager Mark Doolittle.

The trend began over a year ago with the housing slowdown, and was exacerbated by “gas prices going through the roof,” he said. A number of those coming in have been small contractors “who are shutting down because of the slowdown, and have to find other means of employment.”

The recession has also caused a roughly 25 percent drop in the store’s retail sales, Doolittle estimated.

With pawnshops acting more like banks, are bankers concerned that pawnbrokers might be infringing on their turf? Not really, said Marshall MacKay, president and CEO of the Independent Community Bankers of Minnesota.

“I don’t know that they are competing with community banks in the deals they are doing. Access to credit is important to everybody. In an economic slowdown, people look for all possible, viable alternatives; payday loans are one of them. Most banks don’t cater to payday loans, they have longer horizons.”

While pawn shops can fare well in tough times, the pawn business is “not quite recession-proof,” Fasching said.

“’Durable’ might be a better word,” she said, noting that the economic downturn has cut into the chain’s sales “like every other retailer, but our revenues are up across the board, because we’ve added stores.” Last year, the chain added one store each in Bloomington and downtown St. Paul; it plans to open four more in 2009.

The increase in the price of gold prices in 2008 helped increased customer traffic at Pawn America stores, Rixxman said: “More people have been selling merchandise to us than ever before.”

For 2008, Pawn America recorded a nearly 25 percent increase in same-store sales, according to Rixxman. The per-store average number of transactions was up more than 40 percent. The chain opened three new stores last year, for a total of 20 stores in Minnesota, the Dakotas and Wisconsin. However, higher costs – including a 20 pe
rcent increase in staff – reduced the chain’s net profit by a single digit percentage compared to 2007, he said.