Asset-Based Loans: Not Your Father’s Pawn Shop

With credit still tight, small-business people look to leverage their assets to obtain start-up and operating cash.
David RosenbaumFebruary 26, 2013

A Canadian businessman had a chance to buy a franchise. To raise cash, he borrowed from friends and relatives, and invested a chunk of his own savings. That covered his initial costs, but to get the business running the way he wanted it to, he needed to invest another $50,000–$100,000. That money was not sitting in his bank account, his friends’ pockets, or his desk drawer.

What was sitting in his drawer (actually, a safe-deposit box) was a collection of diamonds.

“I had other resources available, but I didn’t want to access them and tie up other credit facilities,” he says, declining to allow his name to be used in this article because, well, he owns diamonds and (reasonably) prefers that people not be able to connect them to him.

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The businessman has been buying diamonds for 20 years–25 years “as an investment” but “you can’t take diamonds to a bank to use as collateral.” He didn’t want to sell them, and they “were worth more than I needed to borrow.” However, he had heard about asset-based financing and contacted fellow Canadian Steven Uster, who founded Zillidy, an online finance company designed “to help small-business owners who need short-term bridge loans.”

Today, with credit for small businesses still relatively tight, and with many small-business people already having taken equity out of their homes to finance their businesses (a source of capital that was heavily leveraged during the late, lamented housing boom), traditional routes to obtaining funding for cash flow needs can be bumpy and time-consuming, if they’re accessible at all.

As Federal Reserve chairman Ben Bernanke said in a 2010 talk, “The formation and growth of small businesses depends critically on access to credit.” And while using personal assets to obtain credit may sound like what people usually call pawning, personal asset lenders don’t like the term.

“It’s not pawning,” insists Uster, who in 2009 founded Eldridge Capital, a factoring firm (which lends money against accounts receivable) for businesses with annual sales of between $2 million and $30 million. “It’s essentially like having a home-equity line of credit, but instead of tapping the equity in your house, you’re tapping the equity in your personal assets.”

The word pawn “has a stigma,” Uster continues. Zillidy, he says, is like a “private bank” that focuses on collateral rather than creditworthiness (as banks do) or on a predictable stream of future revenue in the form of receivables (like a factor).

“You bring a pawn shop a $10,000 Rolex, first they’ll tell you what’s wrong with it. Then they’ll loan you a thousand. Then every month you have to go into the shop and pay interest on top of insurance and storage and standing-on-one-foot fees,” he says, referring jokingly in the last instance to a bevy of possible hard-to-understand or undisclosed fees. “And if you miss the reclaim date on the watch, or you can’t afford to reclaim it, they take ownership.”

To get a loan from Zillidy, the borrower fills out a form on the company website. “You tell us what the asset is; we send you a loan offer based on what we can liquidate the asset for. We’ll loan up to 90% of the asset’s value. So if we believe that Rolex is worth $10,000, you send it to us FedEx, fully insured, and we deposit $9,000 into your bank account where it’s available to you within 24 hours,” Uster says. The lender would keep the Rolex until the loan is repaid.

Each month the firm deducts 2.9% of interest (34.8% APR) by debiting the borrower’s account, charging no other costs or fees. The borrower can keep the loan going as long as he or she wants. “If you can’t repay, or don’t want the watch back, there’s no impact on your credit, as there would be on a credit card or a line of credit at a bank. We do not report to credit agencies and we never use collections agencies. If we sell the watch for $12,000, we take the $9,000 loan, and interest, and send the difference to you,” adds Uster.

According to the anonymous franchise owner, “This is very different than walking into a pawn shop and selling an asset at a substantially discounted price. It was the easiest thing I ever did. I met with [Uster’s] gemologist. I didn’t need to liquidate the diamonds. I didn’t have to transfer ownership. It was just a loan with a guarantee, using the diamonds as collateral.”

The franchise owner says he wasn’t using the loan as a last resort. “I was using it as the most convenient resort: access to short-term capital if you can’t go the traditional route,” he adds.

There are, of course, risks. The borrower can always lose the asset because of lack of repayment. So before using it as collateral for a loan, borrowers should think realistically about how (or if) they will be able to pay off the loan, and then what their lives would be like without the asset should reclaiming it become impossible.

However, says Uster, “We’re in the business of making loans, not selling assets. We really don’t want our clients to default.”

Personal asset lending sites like Zillidy, and Borro, which offers short-term loans of up to $1 million against everything from watches to gold bars to luxury cars and even fancy wine (Borro claims to have recently loaned $23,000 against an unopened case of Chateau Petrus, vintage 1989), are proliferating, with the web shielding the small-business borrower from the stigma and discomfort of entering a sketchy neighborhood to walk into a shop with three balls hanging over the front door.