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How to Start a Pawn Shop Business

Pawn Shop Business

Do you want to start a pawn shop business from scratch? If YES, here is a 23-step guide to starting a pawn shop from home with NO money and no experience plus a sample pawn shop business plan template.

A pawn shop offers secured loans to people when they use items of their personal property as collateral. A pawn shop is a shop where people from all walks of life from the average man to the rich man can go in to buy and sell things. You can also use your valuables as collateral to get a loan from the pawn shop.

An item is usually pawned for a loan within a contractual period and the customer is expected to redeem the item for the amount of the loan in addition to some agreed amount as interest.

The time and rate of interest is normally governed by the pawnbroker’s policies or the law. If a loan is not paid within the agreed period, the item that was pawned will be put up for sale by the pawnbroker.

How Do Pawn Shops Make Money?

When a customer defaults on paying a loan within the agreed period, the item becomes the property of the pawn shop and the pawnbroker can recoup the money that was loaned by selling the item in his possession. Common items that are pawned by customers include electronics, gold, silver, platinum, metal, gemstones, tools, musical instruments, and collectibles.

Even though some of the jewelry might be broken or have missing pieces, they are still of value. Some pawnshops that have firearm licenses sell rifles and pistols to customers that meet up with the necessary law requirements.

Pawnbrokers are responsible for assuming the risk in the case that the items that are brought into their shops might be stolen items.

In some jurisdictions, the laws there protect the community and the broker from unknowingly handling stolen goods as the law requires that the pawnbroker should establish positive identification of the seller through the provision of photo identification.

A holding period is also placed on items that are purchased by the pawnbroker so as to allow the local enforcement authorities time to track the item if it was stolen.

Pawn shops in some jurisdictions are required to provide a list of all the newly pawned items in their possession and the associated serial number to the police. This way the police can be able to determine if any of these items have been reported to be stolen.

Police departments often advise robbery or burglary victims to go to their local pawnshops to try and see if they will be able to locate any of their stolen items. In some pawnshops, they set up screening criteria so that they won’t fall into the trap of buying stolen items.

Steps to Starting a Pawn Shop Business

1. Understand the Industry

The pawn industry has enjoyed a period of conservative growth according to a survey carried out in 2015 by the National Pawnbrokers Association.

The growth was associated with consumers releasing disposable gold during the peak gold price periods. This survey result shows that there is a 3-5% increase in the overall business of pawn brokering, with pawn loans being the core of their businesses.

Over 80% of pawnbrokers also corroborated the fact that pawn loans were the most common transactions that they carried out in their shops.

Interesting Statistics About the Industry

The reason for the growth can be associated with the fact that the pawn shops are consumer friendly and there has also been increased public awareness and a positive image of the business being portrayed to the general public. This way, they have been able to attract more customers hence the growth in the industry.

As at 2011, the pawn shops constituted a $14.5 billion market share and revenue has been forecast to grow by 6.3% to $19.88 billion in 2016.

The national average pawn loan was $80 in 2008 and increased to $100 by 2009. In 2015, the national average pawn loan remains at $150 according to the report of the survey carried out by the National Pawnbrokers Association. The industry employs about 28, 946 people with about 11,000 pawn shops in the united states.

Jewelry sales have been accounted for as the most significant share of pawnbroker’s total receipts while the remaining sales are got from musical instruments, consumer electronics tools, and sporting goods. 50% of revenue is derived from merchandise sales and 50% from pawn loans given out to their customers.

The pawn business industry is however saturated with shops springing up here and there as everyone thinks they are capable of running this business. Too many shops are chasing a few customers in the same area.

The factors and incentives that encourage people to go into this industry are because of the returns you get on your investment. It is a very profitable venture. Apart from the risk of you buying stolen items, an aspect which anyone in the business is very careful about, the returns on investment are very good.

Even when customers default on their loan, you can recoup your money by selling the item they used as collateral for the loan they brought in.

2. Conduct Market Research and Feasibility Studies

  • Demographics and Psychographics

The demographic and psychographic composition of the people who need the services of pawnshops cuts across members of the public, communities, households, and people from different walks of life as long as they have an item to sell, buy or they need to get a loan.

The following people are the kind of people that use the services of a pawn shop:

  • Wealthy people
  • Businessmen and businesswomen
  • The general public
  • Students
  • Office workers

3. Decide Which Niche to Concentrate On

If you want to start a pawn shop business, there are a couple of niches in the business you can choose to specialize in. Some of the niches are capable of fetching you more money than others. The following represents the niches that one can specialize in if you need to set up a pawn shop business:

  • High-value niche
  • Jewelry and electronic niche
  • Musical instrument niche
  • Go-carts niche
  • Electric wheel-chair niche
  • Tools niche
  • Motorcycle niche
  • Car niche
  • Motor homes niche
The Level of Competition in the Industry

Survival in the pawn business industry is based on having a good knowledge of the way the industry works. You have to look at the kind of customers you want to attract and create a unique and interesting experience to draw them in. if you are in a high-class neighborhood, you should know that a low-class pawn shop will not be a good fit for that neighborhood.

Big-time investors like Metro Pawn and American Jewelry and loan in the business have a big stake in the pawn business industry, but there is still enough room to accommodate the new pawn shops that are just coming into the business.

As an entrepreneur just starting out in the business, what you should focus on is getting sufficient capital after the initial startup capital that you can use to build a solid pawn loan base.

Another important thing to focus on is getting the necessary knowledge and tools to identify and test gemstones and precious metals because they account for over 50% of items offered for sale or pawn loans. You will soon be out of business if you cannot differentiate between different precious metals brought into your shop.

4. Know Your Major Competitors in the Industry

There are a lot of pawn shops available but some of them have built a solid reputation in the business over time. Some of these reputable pawn shops have been in business spanning over generations. The following represents a list of leading pawn shops available to the public:

  • Gold and Silver Pawn Shop
  • Metro Pawn
  • American Jewelry and Loan
  • Simon Jewelry
  • Dock Brothers Pawn Shop
  • Hoosier God Buyer
  • Cash America Pawn
  • Pawn Plus
  • Super Pawn
  • Lew Silver Diamond Brokers
  • Hendrick’s County Estate Buyers
  • Crazy Mary’s Buy and Sell
  • Aaron’s Jewelry and Loan Inc.
  • Alex Gold and Silver and Laptops
  • Alex and ANI Venetian
Economic Analysis

Starting a pawn shop business requires conducting a lot of critical economic analysis to protect your business from the risks associated with starting a new business.

You need to be conversant with the regulations of the location you choose to open up your business in as they vary from one location to the other. These include the minimum holding times, maximum financial charges, unredeemed pledge disposals, and other important business metrics that you will need to comply with.

Utilize every available resource that you can to ensure that your pawn shop business becomes a success. People have been in this business for generations when there was no initial experience in pawn broking and they are still thriving. These days there is a better organization within the industry with the state and national trade associations now professionally organized and a source of valuable information for inexperienced pawnbrokers.

There are several how-to books, programs, and industry experts that are available for you to get the necessary information and consult with in order to start your business on the right track. Using them will ensure that you avoid making costly mistakes and provide you with better financial security for your pawn shop business.

5. Decide Whether to Buy a Franchise or Start from Scratch

If you want to be independent, you can consider starting your own pawn shop business from scratch. This way you will be able to have full control over what happens in the business, transfer ownership to your children later on or sell the franchise sometime in the future.

On the other hand, if you choose to go into a franchise with another company, you will be taking on an existing brand. So if adhering to strong brand identity is a thing that appeals to you, you should go for it.

In a franchise system, you remain an independent business where you can operate your own shop while the franchisor is there to help you out with staff hiring, financing, marketing, and negotiating leases.

6. Know the Possible Threats and Challenges You Will Face

The pawn shop industry is subject to threats and challenges. One such problem is the problem of the social connotation that these shops are a den for thieves because they are supposedly responsible for accepting stolen items from people in exchange for money. This makes some people avoid going there.

Another challenge commonly experienced by pawn shops is the problem of cash flow. All pawn shops, especially those just starting out in the business always experience negative cash flow periods, with January, July, and August being the most prevalent months. There are also periods of dramatic ups and downs in your loan balance in these months.

Other factors that can pose threats and challenges to startup pawnshop businesses include local economic conditions and large layoffs. Some people also have the impression that pawn shops are shady places where you will find people with long hair and tattoos transacting shady businesses.

7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)

To start a pawn shop business, various legal requirements exist that you will need to satisfy. To become a pawnbroker, you fall under a wide variety of local, state, and federal regulations and compliance with them is mandatory and not optional.

You need to establish the pawn shop business legal structure, whether it is a corporation or a sole proprietorship. Incorporating your business enables you to enjoy limited liability. You become a shareholder and you are not liable for the corporation’s debts. Your liability will be limited to the amount you invested in the business as an individual shareholder in the pawn shop business.

Being the sole proprietor of a pawn shop business dictates that you assume all the liability of the company. Such things as your personal house and your car can be seized to pay off debts in the case that you incur debts.

8. Choose a Catchy Business Name

If you want to choose a company name for your business, a name that is easy to spell and simple is what you should aim for. This way, the name of your pawn shop will be easily remembered. The following represents a sample of a business name that can be used for naming your pawn shop business:

  • Platinum Pawn Shop
  • Gems Pawn Shop
  • Vegas Pawn
  • Super Pawn Shop
  • Smith & Sons Pawnbrokers
  • Alex & Sons Pawn Shop
  • Gold Jewelry Pawn
  • Jewelers Pawn
  • Top Pawn Brokers

9. Discuss with an Agent to Know the Best Insurance Policies for You

Insurance is very important if you are going to start a pawn shop business. The right insurance required by this industry will help your business to be successful. There are a lot of specialized needs that are related to the type of insurance required by a pawn shop business.

It is important that you assess your risk and protect your business from making a loss. You need to get a good insurance provider with exceptional coverage at competitive pricing so that your business can be successful and profitable.

Create a budget for insurance as a matter of importance and employ the services of an insurance broker to ascertain the best insurance policy needed for your business. The insurance broker will evaluate the risks involved for your business and give you the appropriate advice on which policies you need.

The following are some of the insurance policies you need, should you intend to start a pawn shop business:

  • General Liability Insurance
  • Business property insurance
  • Property coverage insurance
  • Business owner’s policy
  • Business auto insurance
  • Commercial umbrella policy
  • Health insurance
  • Risk Insurance
  • Fire insurance policy
  • Payment protection insurance
  • Professional liability insurance
  • Workers comp insurance

10. Protect your Intellectual Property With Trademark, Copyrights, Patents

Filing for intellectual property protection is important in starting a pawn shop business. The problem of copyright piracy, counterfeiting, and patent infringement is the reason why any business owner should consider filing for it. The business name of your company, logo, and other important documents are protected upon filing for intellectual property and trademark.

In order to file for intellectual property and also register the trademark of your pawn shop business, you are required to begin the process with the USPTO, there you will be required to fill out an application form, and the final approval for a trademark is then subjected to review by the attorney which is a requirement by the USPTO.

11. Get the Necessary Professional Certification

It is essential to have some form of training for you and your staff so as to have an edge over your competitors. Running a pawn shop business might seem like a piece of cake, but when you start the business, you will realize that having your staff trained will help your business grow.

If you give your staff the right training, easier it becomes for you to retain existing customers and attract new customers. The following training can be advantageous to the success of a pawn shop business.

  • Pawn shop operation and management
  • Gold appraisals training
  • Diamond appraisals
  • Gadget appraisals

12. Get the Necessary Legal Documents You Need to Operate

To set up a pawn shop business, you are required to meet the legal documents needs as stipulated in the area where you reside. Some pawn shops are licensed at the state level, others at the local level and they could be licensed at both levels. The following is the list of legal documents that you need to have to set up your pawn shop business:

  • Certificate of Incorporation
  • Business License
  • Business Plan
  • DBA business name
  • Non – disclosure Agreement
  • Memorandum of Understanding (MoU)
  • Pawnbroker’s license
  • Precious metal dealer license
  • Second-hand dealer license
  • Sales tax permit
  • Federal tax identification
  • Federal firearms license
  • Operating Agreement
  • Company Bylaws
  • Operating Agreement for LLCs

13. Write a Business Plan

To set up a pawn shop, the first thing to do is to consult an expert who can help you write a good business plan which you can work with.

Running a successful pawn shop business begins with having a good business plan written down. Without a business plan, you won’t be able to get financing for your business when the need arises, as lenders won’t consider your request for a loan.

The blueprint needed to run a successful company is your business plan. With a workable business plan, there is no room for using the trial and error method in running the business.

Management of your pawn shop comes with purpose and precision and you will know what should be done in certain instances such as how to handle challenges in the business and also how to accommodate the growth and expansion of your company.

You are expected to put down a detailed business plan that is very realistic; putting down facts and figures and the indices that apply to the pawn shop industry that you intend to start a business in.

A business plan is not just a business document for operating a business; it is a detailed guide that can help you run your business efficiently. The strategies with which you intend to manage and grow your pawn shop business should be listed therein.

Whatever you do, try not to over-project in putting down figures for the profit and income aspect of the business. It is more sensible to underestimate so that you will not be disappointed when reality eventually dawns on you. The important areas that need to be covered in a business plan include the following:

Executive summary and Company’s description

You need to write about the concept of your business, and put down a description of the company, the vision statement, the mission statement, and the location of the company. You should also indicate if you intend to sell out your franchise or have outlets in different cities or in other parts of the world.

Some key components that should not be missing from your business plan include SWOT analysis, products, and services offering, marketing and sales analysis/strategies, competitive analysis, target market, market goals, pricing, expansion, and growth strategies, costing and financial projection, publicity and advertising strategy, budget and start-up capital.

14. Prepare a Detailed Cost Analysis

To start a successful pawn shop business, you will incur some expenses. As a result of this, you need to do a comprehensive market survey and feasibility studies before going ahead to develop a budget and find a source of funding to finance your pawn shop business.

The basic cost that needs consideration in the actualization of your plan to start a pawn shop business should include the following:

  • The Total Fee for incorporating a business – $750.
  • The budget for permits, Insurance, and license – $10,000
  • The Amount needed to rent a suitable office with enough space (Re-Construction of the facility inclusive) – $30,000.
  • The Cost for equipping the office (shelves, lockable display cases, cash register, security system, furniture, filing cabinets, safety gadgets, computers, printers, telephones, fax machines, and electronics) – $20,000
  • The Cost to Launch an official Website – $700
  • Additional Expenditure (Signage, Business cards, Adverts, and Promotions) – $2,500
  • Miscellaneous expenses- $5,000
  1. To set up a small-scale business, you will need $100,000
  2. For a medium-scale modeling agency business, you will need an average of $1, 000,000
  3. For a large-scale business, you need up to $10,000,000

15. Raise the Needed Startup Capital

Starting a pawn shop business on a small scale doesn’t require too much capital to set it up. If you decide that you want the company on a large scale, you need more capital to start the company and you might need to raise some of the needed capital as you might not be able to come up with all of the required funding.

Starting a pawn shop business on a large scale requires that you get office space, equipment, and furniture, capital for supplies, and budgeted capital for about three months’ salaries for members of your staff.

Once you have a business plan that is workable in place, you don’t have much work to do in convincing your bank, investors, friends, and other people who can help finance your business idea to buy into the business and give you the capital you need.

The following are ways by which you can fund your pawn shop business:

  • Raising capital from selling personal stocks, properties, and personal savings.
  • Raising capital from investors and business partners
  • Applying for a bank loan
  • Pitching your business idea and applying for seed funding from donor organizations and angel investors
  • Sourcing for loans from your friend and family members.
  • Using money from your Credit cards
  • Getting cash advance against the income from your credit card
  • Raising money through venture capital
  • Through grants and subsidies

16. Choose a Suitable Location for your Business

Choosing the right location is important to the survival and growth of any business and the same also goes for your location of choice in siting your pawn shop business.

You might want to engage the services of a consultant before you make a final decision on where you intend to site the company. The wrong location can adversely affect your business and your pawn shop will struggle to make ends meet and eventually close down.

Pawn shops are expected to adhere to minimum distance requirements from certain establishments such as schools and so on. As a result of this, you need to contact your city & rsquos planning department before you select a location for your pawn shop.

You can also consider occupying an old pawn shop in a safe neighborhood to reduce the need for additional permits and zoning approval. Make sure to get a flexible lease just in case you do not get the approval for your pawnbroker & rsquos license To choose a location for your pawn shop business, the following factors should be considered:

  • Mode of operation
  • demography of the location
  • The amount of foot traffic
  • The availability of competition
  • Proximity to other businesses and services
  • Accessibility of the place and parking space for your clients
  • Ordinances and zoning restrictions
  • Traffic and security
  • The building’s infrastructure in terms of what is required to support the high technology needs of contemporary business

17. Hire Employees for your Technical and Manpower Needs

To set up a successful pawn shop business, you should be mindful of the interior decoration of your office. Design the front room of the shop to look like a typical variety store that has a homey feel to it. In the layout of this front room, fashion out the loan area so that it resembles the usual small branch of a bank in a Grocery Store.

In the midst of all this designing, keep security and traffic patterns in mind. A pawn shop designed this way gives a warm and friendly feeling that can attract new customers and retain old ones.

Make the classiest part of your front room to be the retail jewelry area and carve out a private room where you can negotiate loans with high-end customers. Your office should also be equipped with other basic needs such as telephones, furniture, tools, and equipment.

Consider renting or leasing an office space for your pawn shop. The choice you make will be based on the budget you have at your disposal and the size of the company you have in mind. If you have enough money, you can consider leasing an office space as this can work for long-term planning.

The number of employees you start out with initially will also be based on the budget you have to work with. You can place advertisements in the paper or online to get workers for your pawn shop. The people you need on your team include the chief executive officer, human resource manager, store manager, gemologist, accountant, receptionist, sales officer, and security officer.

A minimum of eight staff is alright for you to manage a small to medium-scale pawn shop business. You can hire part-time staff if the occasion arises where you need to get a trainee manager to give your staff in-house training, especially where they do not have previous pawnshop work experience.

The Service Delivery Process of the Business

The kind of services that a pawn shop offers depends on the niche that it specializes in. If your pawn shop specializes in a high-value niche, customers that will come to your pawn shop are the wealthy kind of clients who either come to pawn their valuables for money because they need a short-term loan that cannot be got from banks or they have lots of valuable assets that can be traded off for money but they are not financially buoyant.

The jewelry and electronic niche attracts clients that need to sell off their jewelry or electronics for money or get a loan in exchange for their valuables. This kind of niche can cater to clients that are both high-end and low-end depending on the value of the item that needs to be pawned.

18. Write a Marketing Plan Packed with ideas & Strategies

A pawn shop will need to market, advertise and promote its business so as to attract new clients and keep old ones. In order to do this, ensure that you have a budget for carrying out your marketing activities.

A good personal profile and company profile are important to the success of the pawn shop’s marketing activities. The profile should include the company’s management team and the board of directors. Marketing of your pawn shop to potential clients can be carried out through the following methods:

  • Advertising on the company website or through magazine ads
  • Giving updates on social media about your pawnshop
  • Informing local media to put the word out about your pawnshop
  • Printing business cards and fliers
  • Sending out press releases
  • Giving special incentives to your first set of clients so that they can spread the word around about your pawnshop
  • Creating a company brochure to show clients
  • Listing your pawn shop on local directories/yellow pages
  • Advertising on radio and television stations

19. Develop Iron-clad Competitive Strategies to Help You Win

It is challenging to be in competition with existing pawn shops that are already in the business. As a result of this, take time to choose the people that are going to be on your management team so that they will be able to take the business to the next level.

Study your competitors in the pawn shop industry and compare your business ideas with theirs. Find out their strengths and weaknesses, and then compare them to your own to see if you can improve on your weaknesses and build on your strengths.

If your clients get a better service from another pawn shop, they won’t come back to your own shop so make sure that you offer them a service they can’t refuse. Alternatively, you can form partnerships with existing pawning shops in the industry to have an advantage over your competitors so as to position your company to get more clients to do business with.

20. Brainstorm Possible Ways to Retain Clients & Customers

No matter the kind of business you are engaged in, customer satisfaction is important in retaining customers for your business. When you are able to satisfy a client with the level of service you render to them, they will always come back and bring more business to your company.

On the other hand, if your customers have a bad experience while doing business with you, they will look for your competitors and give them the business that could have otherwise been yours. Bad customer service, therefore, constitutes a major reason that makes businesses lose customers.

As you improve on the quality of your service delivery, so will your client base increase. In the pawn shop industry, having good customer relationship management practices is important to keeping your clients.

This can be achieved by getting good software for your business and also to keep up with your client. With this, you have relevant information concerning your business and your clients at the tip of your fingers which you can use to keep in touch with them on important occasions like birthdays, anniversaries, and public holidays.

21. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity

The caliber of clients you have worked for in the past is important for the branding of your business. Discuss with a consultant to help you put in place a strategy for publicity and advertising directed towards your target market. Ensure your brand is visible and communication lines are clear. The following platforms can be used for brand awareness

  • Advertise your company on websites and magazines
  • Listing your business on local directories/yellow pages
  • Advertisement on satellite TV and radio stations
  • Direct email marketing
  • Take advantage of social media
  • Brand your company vehicles and shirts

22. Create a Suppliers/Distribution Network

There is room for networking in the pawn shop business because you have to source for goods for your business from different sources.

You can also join the national pawnbrokers association. Alternatively, consider forming an alliance with other pawn shops in the business. This way, you can be able to learn from one another and trade valuable information with each other in the business.

23. Tips for Running a Pawn Shop Business Successfully

The success of any business lies in ensuring that the workers strive to together to work in line with the vision and mission of the company. The CEO of a pawn shop business is expected to give direction to the staff to ensure they work in line with organizational goals and objectives.

Staff meetings should be held because they are important to keep the CEO informed about what goes on in the company. These meetings should be held regularly so as to get feedback which is important to the success of the business.

Performance appraisals should be done regularly to find out if the staff is following the standard operating procedure of the company, the results obtained can then be used to correct any errors found.

Finally, give your staff training to help them perform their duties effectively, give praise to encourage and motivate staff, reward hard work to promote healthy competition, and operate an open door policy to encourage staff to be open about their feelings with you.