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.
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Learn how to start your own Pawn Shop and whether it is the right fit for you.
Start a pawn shop by following these 10 steps:
- Plan your Pawn Shop
- Form your Pawn Shop into a Legal Entity
- Register your Pawn Shop for Taxes
- Open a Business Bank Account & Credit Card
- Set up Accounting for your Pawn Shop
- Get the Necessary Permits & Licenses for your Pawn Shop
- Get Pawn Shop Insurance
- Define your Pawn Shop Brand
- Create your Pawn Shop Website
- Set up your Business Phone System
There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your pawn shop. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
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STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
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 ongoing expenses for a pawn shop?
Rent, utilities, salaries, and security are all part of ongoing expenses associated with owning a pawn shop.
Who 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.
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.
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.
What will you name your business?
Choosing the right name is important and challenging. If you don’t already have a name in mind, visit our How to Name a Business guide or get help brainstorming a name with our Pawn Shop Name Generator
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your pawn shop is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
- LLC Taxes
- Sole Proprietorship vs LLC
- LLC vs Corporation
- LLC vs S Corp
- How to Start an S Corp
- S Corp vs C Corp
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
Besides being a requirement when applying for business loans, opening a business bank account:
- Separates your personal assets from your company's assets, which is necessary for personal asset protection.
- Makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank or credit union.
Open net 30 accounts
Net 30 accounts are used to establish and build business credit as well as increase business cash flow. With a net 30 account, businesses buy goods and repay the full balance within a 30-day term.
NetMany net 30 credit vendors report to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our best net 30 vendors, guide and start building business credit.
Get a business credit card
Getting a business credit card helps you:
- Separate personal and business expenses by putting your business' expenses all in one place.
- Build your company's credit history, which can be useful to raise money later on.
Recommended: Apply for an easy approval business credit card from Divvy and build your business credit quickly.
STEP 5: 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.
Make LLC accounting easy with our LLC Expenses Cheat Sheet.
STEP 6: 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.
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.
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.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: 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.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
If you already have a logo, you can also add it to a QR code with our Free QR Code Generator. Choose from 13 QR code types to create a code for your business cards and publications, or to help spread awareness for your new website.
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.
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.
Still unsure about what kind of business you want to start? Check out the latest Small Business Trends to help inspire you.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use. Check out our review of the Best Business Phone Systems 2022 to find the best phone service for your small business.
Recommended Business Phone Service: Phone.com
Phone.com is our top choice for small business phone numbers because of all the features it offers for small businesses and it's fair pricing.
Start a Pawn Shop in your State
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
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Is this Business Right For You?
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.
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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 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 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.
Take the Next Step
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.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
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 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.