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How To Start A Pawn Shop

How To Start A Pawn Shop

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How To Start A Pawn Shop

How To Start a Pawn Shop

Pawn shops sometimes have a negative reputation, but the truth is that these shops often act as a financial lifeline to people who need a little temporary help. As the owner of a pawn shop, you’ll have an opportunity to help people in need with short-term loans that they might not otherwise be able to access. You can also buy valuables outright to resell. Pawn shops aren’t only profitable businesses, but they also often help customers too. If you have strong financial knowledge and are savvy when it comes to valuing and reselling items, starting a pawn shop might be an enjoyable business option for you.

Business Overview

Pawn shops offer customers short-term loans to help them cope with financial emergencies. Customers bring in items of value – usually electronics, gold, jewelry, or gems – to serve as collateral in these loans. The pawnbroker has the option to decline or accept the item, then will offer a loan that’s usually a percentage of the item’s worth.

These loans carry interest, and customers are given a set amount of time to repay the loan, plus all of the interest, at which point they will receive their item back. If the customer doesn’t repay the loan by the deadline, the pawnbroker will own the item outright, and they can sell it to redeem what they’ve paid out in the loan, plus any other profit that the sale brings in.

Some pawnbrokers will buy items outright, often from garage sales, flea markets, auctions, Craigslist, etc., and profit from the sale. Besides providing loans, some shops offer additional complementary services, like check cashing and bill pay services.

Industry Summary

According to the National Pawnbrokers Association, there are approximately 11,000 pawn stores, most of which are family-owned small businesses. According to IBISWorld, the pawn shop industry is growing at an expected annual rate of 3.01%, and is forecasted to reach $4.5 billion by 2027.

One of the trends driving the pawn shop industry is the increasing adoption of online channels, which has created an opportunity for local pawn shops to expand their consumer base internationally.

Thrift Store

Target Market

Pawn shops market to potential customers who need money to cover expenses. These customers may have lost a job, be facing an unexpected bill, or be in some other situation that means they need to quickly produce money that isn’t currently available to them. Because of this market, pawn shops tend to be located in lower-income areas.

Checklist To Start A Pawn Shop

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If you’re thinking about starting your own pawn shore, there are a few things you should keep in mind. Here is a checklist of the essentials to get started.

Step 1: Research the market

Starting a new pawn shop requires thorough market research to understand if there is enough demand in the area where you plan to open your business. Here are some steps you can take to conduct this research:

Demographic Research: Understanding the demographic makeup of the area where you plan to open your business is crucial. You’ll want to know the population size, income levels, and employment rates. This information can be gathered from U.S. Census data.

Competitor Analysis: Look at the number of existing pawn shops in your targeted area. Check out their size, the services they offer, their online reviews, and how busy they seem to be. You can use online tools like Google Maps, Yelp, and local business directories to find this information.

Survey Potential Customers: Conduct surveys to gauge interest in a new pawn shop. You can do this through online surveys using tools like SurveyMonkey, or you can conduct in-person surveys at local community events or other popular spots.

Economic Trends: Understanding the economic health of your targeted area is important. If the economy is doing well, people might not need to pawn items as often, but they may be more likely to buy items from a pawn shop. Conversely, if the economy is doing poorly, people may need to pawn items more frequently but might not buy as much. Information about local economic trends can often be found in local news sources, the Bureau of Labor Statistics, and local economic development agencies.

Step 2: Write a business plan

Writing a business plan for a pawn shop is crucial for several reasons. It helps you define your business goals, identify your target market, understand your competition, and determine the financial feasibility of your venture. It can also help you secure funding from investors or lenders, as they often require a detailed business plan before they consider investing or lending.

While a business plan for a pawn shop will include many of the same sections as any other business plan, certain sections are particularly important for a pawn shop:

Market Analysis: This section should detail your understanding of the pawn shop industry, including current trends and future predictions. It should also outline your target market and demonstrate that there is sufficient demand for another pawn shop in your chosen location.

Regulatory Environment: Pawn shops are subject to a range of specific regulations, including local, state, and federal laws. Your business plan should demonstrate your understanding of these regulations and outline how you plan to comply with them.

Security Measures: Pawn shops hold valuable items and cash, making them potential targets for theft. This section should detail the security measures you’ll implement to protect your inventory and cash.

Inventory Management: Effective inventory management is crucial for pawn shops. This section should outline your approach to appraising items, determining loan values, and managing inventory turnover.

Financial Projections: This section is especially important for pawn shops because they have unique financial considerations, such as the cost of purchasing inventory, the potential for non-repayment of loans, and the cash flow implications of providing pawn loans.

Remember, a business plan is a living document that should be updated regularly as your business grows and changes. It’s a vital tool for planning, managing, and communicating about your business.

Related: How to write a business plan

Step 3: Find a location for the pawn shop

Be prepared to fight for zoning approval as the perception is that pawn shops are dirty, negative places. This widespread negative view of pawnshops means that it’s even more important to run a clean, well-kept business. Good lighting, attractive displays, and a space that you take pride in are important in building your business’s reputation and bringing in new customers who might otherwise avoid a pawn shop.

Lease costs will depend on factors like the shop’s location, size, and available amenities, like parking spots. Because rentals in high-traffic retail areas often come at premium pricing, most pawn shops will be located in other retail areas that don’t have that same high degree of traffic but are still widely visible. Keep in mind that renting space in a well-kept, popular location may improve the public’s perception of the shop, potentially bringing in customers who might not otherwise have gone to the shop.

Related: Choosing a business location

Step 4: Obtain licenses and permits

The pawn shop industry is highly regulated, so be prepared to meet all federal, state, and local regulations. According to the National Pawnbrokers Association, pawnbrokers need to comply with 13 regulations at the federal level alone, such as the Truth in Lending Act (TILA), Gramm-Leach-Bliley Act, and US Patriot Act. Before you open your shop, take the time to familiarize yourself with all of these regulations to not accidentally violate them and find yourself having to pay fines or close your shop. Consult with your state’s Pawnbroker’s Association for help in identifying and understanding these regulations.

A pawn shop license varies by the state (typically the Department of Financial Institutions) and city regulations, but many require a combination of a pawnbroker license, precious metal dealer license, and/or a secondhand dealer license.  Licensing applications may require a background check, fingerprints, financial statements, credit reports, surety bonds, proof of insurance, and reporting inventory to local law enforcement.

Pawn shops also have requirements to follow under the Consumer Product Safety Improvement Act of 2008. This law states that resellers can’t sell products with high levels of lead unless they have signage stating the amount of lead content.

Also, if you plan to buy or sell guns, a Federal Firearms License from the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) will be needed.

Related: What licenses do pawn shops need?

Obtain General Business Licenses and Permits: In addition to industry-specific licensing, there will be other licenses or permits required to operate. This could include a business license, sales tax license, and Employer Identification Number (EIN).

Related: State guides for business licensing

Other registrations may include:

Forming a Business Structure: The first thing you’ll need to decide is what business structure (also called a legal or business entity) is best for your business. This could be a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. Each of these structures has different implications for liability, taxes, and administrative complexity. Many small business owners opt for an LLC because it provides personal liability protection and has fewer administrative requirements than a corporation.

Related: Comparison of business structures

Registering Your Business Name: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state.

Related: Tips and ideas for naming a pawn shop

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Step 5: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a pawn shop is another. Funding to start a pawn shop can be difficult as a lot of money is tied up in initial inventory and the cash for pawn loans.  

Generally, in order to get a loan, the borrower(s) will need to have good credit and be able to personally invest 15-25% towards the total start-up costs.

Related: Finding the money to start a business

Step 6: Acquire the location

After securing a location for your pawn shop, there are several steps an experienced pawn shop owner would likely recommend to prepare for opening:

Renovations and Layout: Depending on the condition of the location, you might need to do some renovations or modifications. As a pawn shop, you will need to have a clear, organized layout for your customers to browse items. This also helps with inventory management. You might want to have separate areas for different types of items (e.g., electronics, jewelry, musical instruments).

Security Measures: Given the amount of valuable inventory, a strong security system is essential for a pawn shop. Install high-quality security cameras that cover all areas of your shop, both inside and out. Alarm systems are also crucial. Consider installing a monitored alarm system that alerts a security company or police if triggered. Bulletproof glass and secure display cases are also a good idea, especially for high-value items.

Inventory Management System: You’ll need an inventory management system to keep track of the items you have in stock, their value, and their status (for sale, pawned, etc.). There are software systems specifically designed for pawn shops, such as Bravo Pawn Systems, PawnMaster, and Data Age PawnMate. These can help with tracking inventory, managing loans, and reporting for regulatory purposes.

Marketing and Signage: Before you open, you’ll want to start marketing your business. This might include online advertising, direct mail, or outdoor signage. Speaking of signage, make sure your shop’s sign is large, clear, and well-lit to attract attention.

Step 7: Purchase the initial inventory

Starting a pawn shop requires an initial inventory of items that you can sell. Here are some ways you could consider acquiring that initial inventory:

Estate Sales, Auctions, and Flea Markets: These are great places to find a variety of items at lower prices. You might find valuable items like jewelry, antiques, or collectibles that you can resell in your pawn shop.

Wholesale Suppliers: Some items, particularly new ones, can be purchased in bulk from wholesale suppliers. This might include electronics, tools, or musical instruments.

Online Marketplaces: Websites like eBay, Craigslist, or even Facebook Marketplace can be sources of inventory. Just be sure to do your due diligence to ensure that the items are genuine and that you’re paying a price that will allow for a profit margin.

Local Classifieds: Check out local classified ads for people selling items. You might be able to find some good deals.

Collaborations with Local Businesses: Consider partnering with local businesses that sell items you’d like to stock. You might be able to purchase items at a discount or on consignment.

Customers: Once you’ve opened your shop, your customers will become a primary source of inventory through the items they sell or pawn.

Remember, the goal is to purchase items at a price that allows you to sell them at a profit, while also providing a good deal for your customers. Make sure you or someone on your team has strong appraisal skills so you can accurately determine the value of items you’re considering for purchase. Overpaying for inventory can quickly erode your profits.

Step 8: Get your marketing plan in place

A pawn shop can leverage several marketing strategies to increase visibility and attract customers. Building a strong online presence is crucial in today’s digital age, so creating a professional, easy-to-navigate website is a must. The website should include information about the business, the types of items accepted, and any special services offered. Social media platforms, such as Facebook, Instagram, and Twitter, can also be used to showcase inventory, share promotions, and engage with customers. It’s also beneficial to list the business on Google My Business and other online directories to improve local search visibility.

In addition, local marketing strategies should not be overlooked. Participating in local events and sponsoring community activities can help to establish a positive reputation in the local area. Offering excellent customer service and building relationships with customers can also lead to word-of-mouth referrals, which are highly valuable. Moreover, traditional methods such as print advertising, radio spots, outdoor signage, and even direct mail can also be effective, depending on the specific market and customer base.

Regardless of the specific tactics used, the key to successful marketing is understanding the target audience and tailoring the messaging and marketing channels to reach that audience effectively.

Related: Low-cost ideas to market a new business

Step 9: Hire employees

Hiring is a crucial aspect of operating a pawn shop, as the quality of your employees can significantly impact the success of your business. Your staff are the face of your business, interacting with customers, appraising items, and maintaining inventory.

The most common types of employees in a pawn shop are pawnbrokers, sales associates, and store managers. According to PayScale, pawnbrokers make an average salary of $55,000 per year, while sales associates make between $25,000 and $30,000, and store managers could make $50,000 to $70,000 or more, depending on the size and success of the shop. However, these figures can vary widely depending on location, experience, and the specific duties of the role.

In addition to budgeting for employee salaries, a shop that hires employees also needs to pay for other expenses. These expenses include paid time off, worker’s comp insurance, and potentially retirement and health insurance contributions for each employee.

When hiring for your pawn shop, it’s important to look for candidates who are trustworthy, have excellent customer service skills, and possess a good eye for appraising a variety of items. Knowledge of or interest in certain types of merchandise such as jewelry, antiques, or electronics can also be beneficial.

When staffing a pawn shop, here are some tips to consider:

Background Checks: Because of the nature of the pawn shop business, it’s important to conduct thorough background checks on potential hires to ensure they are reliable and trustworthy.

Training: Make sure to provide comprehensive training, especially in areas like customer service, inventory management, and appraisal techniques. If you use specific pawn shop software, ensure employees are thoroughly trained in its use.

Knowledge of Laws and Regulations: Your employees should be familiar with local, state, and federal laws and regulations regarding pawn transactions, including those related to reporting and record-keeping.

Security Procedures: Employees should be trained in security procedures to help prevent theft and ensure the safety of both staff and customers.

Conflict Resolution: The ability to handle difficult situations with customers is important in the pawn business. Training in conflict resolution can be very beneficial.

Ongoing Education: The pawn industry is constantly evolving, and ongoing education can help your employees stay up-to-date with trends and increase their appraisal skills.

Remember, your employees are a reflection of your business. Hiring the right people and investing in their training can help ensure your pawn shop is successful and reputable.

Related: Hiring your first employee

Step 10: Prepare to launch

Before opening your doors to the public, there are several key tasks you’ll need to complete to ensure your pawn shop is ready for business. Each pawn shop’s needs will vary based on factors like location, size, and the specific types of items they deal in. However, these are some of the key areas that every prospective pawn shop owner will need to consider:

Business Insurance: You will need to secure insurance to protect your business from losses due to theft, fire, and other damages. You should also consider liability insurance to protect your business in the event of lawsuits. Some pawn shops also get insurance that covers the value of the pawned items in case of loss or damage.

Related: What types of insurance does a pawnshop need?

Bookkeeping: Setting up a reliable system for bookkeeping is crucial. This can be done using accounting software or by hiring a professional accountant. Accurate bookkeeping is necessary not only for tax purposes, but also for tracking your inventory, cash flow, and overall financial health.

Related: Setting up the accounting for your business

Contracts: In the pawn shop industry, you’ll need specific contracts for pawn agreements with customers. These contracts should clearly state the terms of the loan, including the loan amount, the interest rate, the length of the loan, and the description of the pawned item. It’s wise to work with a lawyer to ensure these contracts comply with local and federal laws.

RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.

Bank Account: Open a business bank account separate from your personal accounts. This will help you keep your personal and business finances separate, making tax preparation easier and providing legal protection.

Credit Card Processing: Set up a system to accept credit cards. This will involve choosing a merchant services provider and getting the necessary equipment. Keep in mind that some providers specialize in high-risk industries like pawn shops, so be sure to shop around for the best rates and terms.

Relationships with Law Enforcement: Given the nature of the pawn shop business, it’s important to establish good relationships with local law enforcement. This can help you avoid legal issues and improve your shop’s reputation in the community.

Policies and Procedures: Establish clear policies and procedures for your business. This includes how you determine the value of items, loan amounts, interest rates, and terms. It also includes policies for handling difficult or potentially dangerous situations. Make sure your staff are well trained in these policies and procedures.

Greg’s Tip: A common mistake to avoid when opening a pawn shop is not having enough cash on hand to buy new items and give out loans. It is important to have a good starting base of items to work with and enough cash to operate the business.

Greg's Business Tip

This material is property of StartingYourBusiness.com

Pawn Shop Startup FAQs

How does a pawn shop make money?

The owner outlines two major ways a pawn shop can generate profit. The first way is through collateral loans, where you lend money backed by an item that’s worth more. The second way is by reselling items you acquire from defaulted loans.

How much does it cost to start a pawn shop?

Starting a pawn shop can be a profitable business, but it does require substantial investment to get up and running. As with any business, costs can vary based on a number of factors such as location, size of the store, inventory, and the specific regulations in your area. Below is a rough estimate of the costs involved in starting a pawn shop.

Store Lease: This will vary greatly depending on your location and the size of the store. A lease can range anywhere from $2,000 to $10,000 per month. For a decent-sized pawn shop in an average location, expect to spend around $4,000 per month. For the first six months, this will be $24,000.

Renovation/Setup Costs: Again, this will depend on the size of your store and how much work is needed. This can range from $10,000 to $50,000. Let’s use a median value of $30,000 for our calculations.

Inventory: To start, you’ll need a variety of items to sell. It’s recommended that new pawn shops begin with at least $20,000 to $50,000 worth of inventory. For our example, let’s assume a middle figure of $35,000.

Operating Licenses/Permits: To operate a pawn shop, you will need a pawnbroker’s license, which will typically cost between $1,000 to $3,000, depending on your location. Other permits may also be required.

Insurance: Pawn shops need insurance to protect against theft, damage, and liability. Insurance costs will depend on your location, the size of your store, and your inventory. Insurance can range from $1,000 to $3,000 per month. Assuming an average of $2,000 per month, six months of insurance would be $12,000.

Security System: Pawn shops require high-end security systems due to the nature of the business. A good security system can range from $5,000 to $15,000.

Operating Expenses: Aside from rent and insurance, other operating expenses can include utilities, payroll, advertising, and maintenance. Let’s assume these costs total $10,000 per month. For six months, you would need a buffer of $60,000.

Adding these up, a rough estimate to start a pawn shop would be:
– Store Lease (6 months): $24,000
– Renovation/Setup Costs: $30,000
– Inventory: $35,000
– Operating Licenses/Permits: $2,000
– Insurance (6 months): $12,000
– Security System: $10,000
– Operating Expense Buffer (6 months): $60,000
Total: $173,000

Please note that this is a rough estimate, and costs can be lower or higher based on the factors mentioned above. It’s always a good idea to conduct a comprehensive business plan and market research to determine the potential costs for your specific situation. Consulting with a business advisor or an experienced pawnbroker could also provide valuable insights.

How much can a pawn shop owner make?

The income of a pawn shop owner can be quite variable, as it depends on a number of factors including the location of the shop, the specific items it deals with, and the owner’s ability to successfully negotiate prices. Here’s a general approach to estimating potential income:

Interest Income: The bulk of a pawn shop’s revenue typically comes from the interest charged on loans. The rate of interest can vary widely, but let’s assume for this example that the average interest rate is 10% per month. If the total amount of money loaned out by the pawn shop (i.e., the total principal) is $100,000, then the interest income for that month would be $100,000 * 10% = $10,000.

Retail Income: Pawn shops also make money by selling items that were pawned but not redeemed. Let’s say that, in a typical month, the pawn shop sells $20,000 worth of such items, and that it originally loaned out $15,000 for these items. The profit from these sales would be $20,000 – $15,000 = $5,000.

Total Monthly Income: Adding these two sources of income together, the total monthly income for the pawn shop would be $10,000 (interest) + $5,000 (retail) = $15,000.

Annual Income: Multiplying this monthly income by 12 gives an annual income of $15,000 * 12 = $180,000.

Remember, this is a very rough estimate and the actual income could be higher or lower depending on many factors. Additionally, this is gross income and does not take into account expenses such as rent, salaries, insurance, and other operating costs. The net income (i.e., the actual profit that goes into the owner’s pocket) would be lower once these costs are subtracted.

When calculating the potential income of a pawn shop, is to budget an allowance to deal with theft, fraud, and the return of stolen merchandise.

In conclusion, while owning a pawn shop can potentially be quite profitable, it also comes with significant risks and challenges. Anyone considering starting a pawn shop should do a thorough analysis of the potential costs and revenues, and should also consider seeking professional advice.

What skills are needed to run a pawn shop?

Starting a pawn shop doesn’t require a business degree, but certain skills and experiences can make the process smoother and increase the chances of the shop being a success.

Finance and math skills. Running a pawn shop business centers around an understanding of finances and the daily use of math. Strong math skills, or the ability to learn, are important.

Resale experience. Because a large component of this business involves reselling used items, some experience in the resale industry is valuable. Experience evaluating, pricing, photographing, and listing items on online platforms is a real advantage.  People will constantly be trying to pawn fake and stolen goods, so knowing the resale market is critical to staying profitable.

Industry knowledge. Working knowledge of the reselling industry, particularly of the value of items like gold and jewelry, will help a pawn shop owner to make wise business decisions. In lieu of familiarity with product resale markets, thorough research skills are important.

Attention to detail. Detail is present in every element of this business, from evaluating products brought in as loan collateral to accurately tracking profits and loan records. A business owner needs to have great attention to detail.

What is the NAICS code for a pawn shop?

The NAICS code for a pawn shop is 311811.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

Resources:
National Pawnbrokers Association

Author

  • Greg Bouhl

    With over two decades as an entrepreneur, educator, and business advisor, Greg Bouhl has worked with over 2,000 entrepreneurs to help them start and grow their businesses. Fed up with clients finding and acting on inaccurate and outdated information online, Greg launched StartUp101.com to be a trusted resource for people starting a business.

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How To Start A Pawn Shop

How To Start A Pawn Shop

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