The folks who run borro Ltd. don't call their company a pawnbroker. That word carries a stigma, bringing to mind low-income customers inside gloomy storefronts with bars on their windows.
Instead, the firm touts itself as an online personal asset lender, whose wealthy customers have expensive tastes and a need for short-term cash. Founder Paul Aitken says that the items his company takes as security against its loans include rare art, bottles of fine wine and luxury cars.
"We do a lot of Aston Martin and Porsche," Aitken says. "Quite a run of Andy Warhol at the moment."
Underneath the glitz, borro is filling a niche for small business owners who can't get a loan from other sources – or who are willing, for whatever reason, to pay a higher price to get cash almost immediately. Borro, which was founded in the United Kingdom and opened an office in New York earlier this year, announced in October that it had raised $26 million in funding led by the venture capital firm Canaan Partners.
Borro's rise reflects the increasing reliance of small businesses on alternative lenders at a time when getting bank loans has become more difficult. Alternative lenders include firms that offer credit against expected future sales and specialists in loans to certain types of small businesses, such as restaurants or e-commerce firms.
What these companies tend to have in common, in comparison to banks and loans backed by the Small Business Administration, are steeper borrowing costs, faster turnaround times, and higher approval rates.
"I think it's fair to say that the recession has made these options much more mainstream for small businesses," says Ami Kassar, founder of Multifunding, a company that helps such businesses obtain credit. "We know they're busy and they're flourishing, and more companies are showing up every day."
Because alternative lenders are largely unregulated, there is no data on the industry as a whole. So it is hard to assess just how much business these companies have taken from the banking industry, much less how durable the shift will be.
The available data do show that during the most recent recession, there was a sharp decline in loans by banks to small businesses. Between the second quarter of 2008 and the same period three years later, such lending fell by $95 billion, or 13%, according to regulatory data analyzed by Multifunding.
In recent months, banks have begun to re-open their purse strings somewhat. A survey by Barlow Research Associates found that in the fourth quarter of this year, more small businesses reported getting full or partial approval for a loan than said they were denied or did not apply for a loan because they expected to be denied. Those results had been reversed every quarter since early 2010.
Still, there remains a large gap between the supply of bank loans and the demand from small businesses.
An October 2012 survey of 1,000 small business loan applications by Biz2Credit.com, a portal that connects borrowers with lenders, found that only 15% of such applications were approved by big banks. By contrast, small banks approved 50% of small business loan applications, and alternative lenders approved 65% of them.
Rohit Arora, chief executive officer of Biz2Credit, says that as bank credit tightened during the depths of the recession, alternative lenders thrived. "They could offer any rate, and businesses would take it, because they had no other options," he says.
In recent months, small banks have begun approving a larger percentage of small business loan applications, according to the Biz2Credit survey. "So that clearly means there will be more competition for alternative lenders," Arora said.
Nonetheless, lots of money has been pouring into the alternative lending sphere, particularly from hedge funds and private equity firms.
In August, On Deck Capital, a firm that offers small businesses loans to buy equipment, purchase inventory, fund a business expansion or provide temporary cash flow, announced a $97 million credit commitment from Goldman Sachs and others.
On Deck makes loans ranging from $5,000 to $150,000 – specializing in credit to restaurants and other retailers, and promising to decide on loan applications within one business day.
Borro, which employs appraisers and stores borrowers' valuables in a dehumidified, climate-controlled environment, promises that customers will receive their money within 24 hours. The company also advertises that it does not conduct credit checks, and it offers free same-day courier services.
At least half of the company's customers are small-business owners, while others are individuals, according to Aitken. He says their motivations vary. Some see a chance to deploy cash opportunistically, while others need the liquidity.
Borro advertises six-month loans of as little as $1,000 and as much as $1 million. Monthly interest rates range from 2.99% to 3.99%, with additional fees charged for insurance and storage. The company states that its loans of $100,000 or more carry an annual percentage rate of 38%, while smaller loans carry APRs of up to 56%.
Defaults on borro's loans are generally in the 10% to 12% range, according to Aitken, but he says the company is well protected. "We have people who don't pay back, but we don't have losses."
For some business owners, alternative lenders are not just a last-ditch option, according to Multifunding's Kassar. The appeal of these creditors lies in their streamlined application process and their fast approvals.
Kassar recounted a recent conversation he had with a jewelry manufacturer who had a chance to qualify for from the Small Business Administration at a rate between 6% and 8%. The man's other option was an alternative loan that carried an onerous 40% to 60% interest rate, but the funds would be available within a week.
"And he chose the latter, because he didn't want to go through the arduous process of applying for an SBA loan," Kassar recalls.
Kassar, whose job is advising small businesses on where to turn for credit, expresses mixed feeling about the rise of alternative lending.
"The reality is that these industries are creating alternatives and options for small businesses," he says. "And if they weren't there, there would be a lot more small businesses shut down today."
But he says that many small businesses are getting forced onto what he calls a high-interest rate treadmill.
"And once you're on them, it's very difficult to get off," Kassar says. "I don't think any business can sustain 30, 40, 50% interest rates. It's a recipe for disaster."
Bob Siewert, senior vice president at the American Bankers Association, says that banks are eager to make loans to viable small businesses. But he adds that many small business owners have lost their equity, and are operating with a cash flow that is barely positive.
"A lot of these people, what they need is equity, not a loan," he says.
Multifunding's Kassar sees the situation differently.
"It frustrates me all the time when I hear bankers say there's no demand for loans," he says. "There's a rich demand out there for these alternative loans right now because the banks are so tight."
Borro is among the new crop of lenders that is trying to tap into borrowers' frustration with banks.
In a television ad for the company that has aired in the U.K., the narrator says: "We're changing the word borrow for good. For too long it's been going to the bank for an overdraft. For too long it's been waiting on credit checks to get a loan. And for too long it's been piling more debt onto a credit card. But not anymore."
Aitken says there is a tremendous opportunity to grow his business in affluent parts of the United States, including California, south Florida and Chicago.
"People need liquidity now more than ever, right? And it's not particularly accessible through the banks," he says. "So there's clearly an opportunity for people who've got innovative business models."