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A pawn shop offers customers collateral loans and buys, sells and trades items of value. Pawn shops allow customers to pawn (or hock) something valuable in exchange for a short-term loan. If the customer returns the money, and the interest due on the loan, the item is returned. But when the customer cannot pay back the loan, the person who owns the pawn shop, or the pawnbroker, sells the item for a profit.
Who is this business right for?
Many people view pawn shops as operating in the gray area between being legal and illegal. While this is mostly untrue, it is important for successful pawnbrokers to maintain a good reputation in the community. Due to the nature of the business, it is helpful if an owner of a pawn shop is someone who is able to get along with a wide variety of people.
What happens during a typical day at a pawn shop?
An owner of a pawn shop usually spends a lot of time maintaining records, filing reports, and doing inventory. At other times, the owner is responsible for making appraisals, buying, and selling items.
What is the target market?
Since a pawn shop makes money in multiple ways, it needs to attract more than one type of customers to be successful. In order to make money off short-term collateral loans, the shop must have customers who need cash to pay for something immediately, do not have or do not want to use other forms of credit, and has a source of income to pay off the loan and interest to redeem the item. To make a profit by selling items, the pawn shop needs customers who want to save money buying secondhand items.
How does a pawn shop make money?
Pawn shops make money in two ways. The first way is to offer collateral loans and to make money on the interest rate. The second way is to sell items at a profit.
What is the growth potential for a pawn shop?
According to Pawn Shops Today, the number of defaults on collateral loans is increasing, while the ability to resell pawned items is decreasing.
What are some skills and experiences that will help you build a successful pawn shop?
An owner of a pawn shop needs to be highly organized to keep perfect records and to adhere to all the laws and regulations related to pawn shops. In addition, an owner should be able to assess the value of a wide range of items and deal with people in potentially high-stress situations. As online sales continue to chip away at brick and mortar stores, the ability for a pawn shop owner to sell online will increase your pawn shop's profits.
What are the costs involved in opening a pawn shop?
It is possible to open a pawn shop for as little as $10,000 dollars, but most cost much more. Since pawn shops make most of their profit from providing loans to customers, possible income is limited by the amount of money available to loan out, so it makes sense to have a significant amount of capital before opening a pawn shop.
Rent: Your largest fixed-cost is rent. Most pawn shops find it better not to choose locations in the high-rent business district, but it is still important to find a location convenient for your customers. Pawn shops need enough space to display, test, and securely store items.
Operating capital: Reserve the bulk of your budget as operating capital. This is the money you will use to make loans and to cover the expenses of running a pawn shop.
Security: Pawn shops have a lot of valuable items and tend to keep a lot of cash on hand. This makes them attractive targets for thieves. Installing a top-of-the-line security system is important for preventing loss and reducing the cost of insurance.
Insurance: Pawn shops need comprehensive insurance to protect themselves from loss and legal liability. The amount of insurance a pawn shop must carry depends on the state where it operates.
Initial inventory: While an extensive inventory is not advisable, an empty showroom does not give the best impressions to customers. Make sure you have at least some inventory in stock before opening the doors but don't spend too much of your entire budget.
Computer system: You will need a computer system for keeping records, printing receipts and researching. Any low-end computer and printer will more than suit your needs.
What are the steps to start a pawn shop?
Once you're ready to start your pawn shop, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your pawn shop is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your pawn shop keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers. Save 15% when you create a business website with Weebly.
Select your state below for an in-depth guide on completing each of these steps in your home state.
Where can I find a business mentor?
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
What are some insider tips for jump starting a pawn shop?
A pawn shop is first and foremost a moneylender. New pawnbrokers should concentrate on building this aspect of the business over buying, selling, and trading secondhand goods. This means instead of spending your limited capital to fill your shop with secondhand items, it is better to keep enough money on hand to lend and to pay rent and utilities for the first few months.
Learn as much as you can before opening, and always continue learning more every day. Spending time learning how to correctly appraise the value of an item is critical to staying in business. Join a regional or national pawnbrokers' association like the National Pawnbrokers Association to help you.
How to promote & market a pawn shop
One of the best ways to promote your pawn shop is online. You should invest the time and money to create a Facebook page and a website. If you tend to deal with one type of item more than others, like gold or guns, you should consider advertising on sites which cater to people who buy these items.
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How to keep customers coming back
Many loan customers come back multiple times a years, so it is in your best interest to provide good service and a fair price. It is important that you avoid alienating anyone and that you make your store as inviting as possible for everyone.
How and when to build a team
Many pawn shops are family-owned and operated, but larger stores will need to hire employees. Hiring employees who have a background working in pawn shops or auction houses is usually a good idea. Make sure to do a thorough background check on any employee before you hire anyone. This will help you avoid potential problems in the future.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a pawn shop business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For more information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Maintain Personal Asset Protection
Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Two of the simplest steps that will protect your business, and yourself, are to:
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
Certificate of Occupancy
A pawn shop is generally run out of a storefront. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a pawn shop.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your pawn shop will be in compliance and able to obtain a CO.
Pawn shops should require clients to sign a services agreement before starting a new project. This agreement should clarify client expectations and minimize risk of legal disputes by setting out payment terms and conditions, service level expectations, and intellectual property ownership. Here is an example of one such services agreement.
How much can you charge customers?
The maximum amount pawn shops can charge customers on a loan is controlled by the state. According to the National Pawnbrokers Association, charging $15 on a 30-day, $150 loan is typical. Pawn shops usually mark up items they sell between 15 and 45 percent.
What are the ongoing expenses for a pawn shop?
Rent, utilities, salaries, and security are all part of ongoing expenses associated with owning a pawn shop.
How much profit can a pawn shop make?
The amount of money a pawn shop owner makes varies greatly by region. According to PayScale.com the average salary for a pawnshop owner is just over $32,000 a year.
How can you make your business more profitable?
Many pawnshop owners add sideline businesses to increase their profitability. Some common side businesses include check cashing, storage, online sales, and appraisal services.