Companies & Industries

Rich and uncreditworthy

Luxury pawn shops? Sure, why not?

Zillidy founder Steven Uster (Photo: Jennifer Roberts)

Zillidy founder Steven Uster (Photo: Jennifer Roberts)

For Steven Uster, pawning does not happen in rundown buildings with flickering fluorescent signs. It happens on a website where most of his clients are entrepreneurs and the average loan size is $10,000. In November, the former Wall Street banker, now based in Toronto, launched Zillidy, a startup he hopes will use the humble roots of a pawnshop to trailblaze an alternative-lending industry for Canadian business people.

While Americans have embraced online pawning, the concept is a tougher sell north of the border. “Canadians tend to be quite conservative with their money,” says Uster. “They have a very close relationship with their banks.” Indeed, 94% have a “favourable impression” of their financial institutions, according to the Canadian Bankers Association. And while research firm ComScore reports Canadians spend more time online than any other nation, Zillidy is the country’s first startup in the pawning space. Uster not only has to show Canadians his service exists; he has the harder task of convincing them of its legitimacy too.

In the U.S., the alternative-lending industry has been blooming since the 2008 credit crunch left a lot of people asset-rich but suddenly pressed for cash. Entrepreneurs also struggled to secure loans from skittish banks. This new breed of borrower flocked to online startups such as Pawntique, Pawngo, Borro and Pawn Confidential that provide large loans—some up to $1 million—in exchange for items such as jewelry and art.

Like their bricks-and-mortar counterparts, these sites charge a monthly interest rate (usually around 3%) and either keep the item or restructure the loan if a client elects to default. They offer discretion and efficiency; clients send the items by mail, and loans arrive within 48 hours without needing approval by a committee or a credit agency. The results are as golden as the Rolex watches being traded in: Marketdata Enterprises reports that growth in the online model caused revenue for the pawning industry as a whole to grow 7.2% between 2011 and 2012.

Though Canadians are hesitant to think outside the bank, they may be forced to. Seven in 10 of Zillidy’s clients so far are business owners or entrepreneurs, most of whom cannot secure loans because of their self-employed status. “They need capital for legitimate reasons, and the bank won’t lend them money,” says Uster. “It’s not like they are down and out.”

When a Halifax contractor needed a loan to help fund a large construction job, for example, he was rejected by his bank for not having adequate proof of income. Instead, he obtained $5,000 from Zillidy in exchange for his heirloom jewelry. When the bank denied a Toronto real estate investor a loan for not having stable income, he pawned luxury watches for $40,000 to help him pay the taxes and maintenance fees on seven condominiums he was trying to flip.

Uster’s confident that if Canadians are open-minded about alternative lending (he refers to his practice as “personal asset lending” instead of pawning to entice a sophisticated clientele), pawn sites could buoy small businesses and help spur innovation. “If you live in a small town in a prairie province, you can now get funding with the click of a button,” he says. “The primary reason startups fail is a lack of money up front. Our platform takes that away.”