Pawn Shop Business Overview
A pawn shop provides short-term loans to customers who offer personal items as collateral. These businesses serve customers who need quick access to cash but may not qualify for traditional bank loans.
Pawn shops assess the value of items such as jewelry, electronics, musical instruments, and tools to determine loan amounts. The typical loan period ranges from 30 to 90 days, during which customers can reclaim their items by repaying the loan plus interest. Pawn shops must carefully evaluate items, maintain detailed records of transactions, and follow strict regulations about reporting to law enforcement to prevent handling stolen merchandise.
The most common business models in pawn shops include:
- Traditional Pawn Model: Full-service locations that offer both loans and retail sales of merchandise
- Retail-Focused Model: Shops that primarily buy and sell merchandise, with lending as a secondary service
- Specialty Pawn Model: Shops focusing on particular items like jewelry, electronics, or musical instruments
Related: Checklist To Start A Business
How Do Pawn Shops Make Money?
Pawn shops earn their primary income through interest and fees on collateral-backed loans. When providing a loan, the shop typically offers 25% to 60% of an item’s resale value. The business then charges monthly interest rates on these loans, ranging from 5% to 25% depending on state regulations. For example, on a $100 loan, a shop charging 20% monthly interest would earn $20 per month until the customer repays the loan. Since loans usually last 30 to 90 days, a single transaction can generate multiple months of interest payments.
Additional revenue streams for pawn shops include:
- Direct Item Sales: Buying items outright from customers at a lower price than retail value, then reselling them for a profit
- Defaulted Collateral Sales: Selling items from unpaid loans after the redemption period expires
- Appraisal Services: Evaluating items and providing professional estimates of their worth
- Buy/Trade Services: Facilitating trades between customers or purchasing items for cash, then reselling them
- Online Sales: Selling merchandise through websites or online marketplaces to reach more customers
Industry Statistics
Pawn shops provide an alternative financial service for consumers seeking short-term loans using personal property as collateral. The industry operates under NAICS code 522299: Pawn Shops. Here are some statistics that show what’s happening in this industry.
Pawn Shop Industry Size & Growth: The pawn shop industry generated $3.0 billion in revenue last year. Over the past five years, the industry experienced an average annual decline of 2.4%. The industry is projected to continue declining over the next five years as improving economic conditions and increased access to traditional lending options reduce demand for pawn shop services (IBISWorld).
Number of Pawn Shops: There are 7,771 pawn shops operating across the country. Two major companies dominate the industry: First Cash Corp and EZCorp Inc. First Cash Corp leads with $1.3 billion in annual revenue, while EZCorp generates $840.9 million. These companies represent a significant portion of industry revenue, though many independent operators serve local communities (IBISWorld).
Pawn Shop Profit Margin: Pawn shops maintain net profit margins averaging 13.9%.
Startup Stories
Also See: Ideas for Naming a Pawn Shop
Costs To Start a Pawn Shop
Starting a pawn shop typically costs between $125,000 and $275,000. This range accounts for different locations, store sizes, and initial inventory levels.
There are several expenses to start a pawn shop, but here are some of the larger costs to consider:
Initial Inventory: Building a base inventory typically costs between $50,000 and $100,000. This allows the shop to have enough merchandise to attract customers while maintaining funds for loans. Having various items like jewelry, electronics, musical instruments, and tools helps establish the business.
Security Systems: A comprehensive security system costs between $15,000 and $30,000. It includes surveillance cameras, alarm systems, motion detectors, safes, and reinforced display cases to protect valuable merchandise and ensure customer safety.
Location and Build-Out: Renovating and preparing a retail space costs $40,000 to $75,000. This covers counters, display cases, lighting, storage areas, and necessary modifications to meet security requirements. The space should accommodate retail displays and secure areas for processing loans.
Point of Sale System: A specialized pawn shop management system costs $5,000 to $15,000. This software tracks inventory, manages loans, maintains customer records, and helps comply with reporting requirements.
These estimates provide a general idea of startup costs, though actual expenses will vary based on size and location.
Resources:
National Pawnbrokers Association