How to Start a Pawn Shop

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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 IBIS World, the pawn shop industry experienced a 1.0% annual decline from 2014 to 2018. During this time, the number of businesses increased to 11,800, while industry employment decreased to 41,370. In 2018, the industry brought in $6 billion in revenue.

This industry’s decline is a result of its close connection to the economy and gold prices. During that five-year period, gold prices fell by an annualized 1.5% rate, and the economy improved. This meant that customers were less reliant on pawn shops to fund emergency needs. As more customers gained employment, their use of pawn shops to access short-term loans also declined.

Keep in mind that there are still opportunities for pawn shops, especially for those that embrace online sales.

Related Industries

Thrift store

Industry Trends

While the overall pawn shop industry declined from 2014 through 2018, Pawn Shops Today reports that 52 percent of pawnbrokers saw an increase in their business during 2018. Those pawnbrokers utilized online sales for their shops and saw growth of up to 25%. These online sales platforms included eBay, Craigslist, and OfferUp. Additionally, pawnbrokers are increasingly operating a website and social media pages to drive sales further.

While retail sales increased, nearly 40 percent of pawnbrokers surveyed also noted that the number of loans they made to customers in 2018 decreased. Most pawnbrokers state that pawn loans are the most common type of transaction that their business performs, with the typical loan being for $150. This decrease in the number of loans could mean that pawnbrokers will need to focus more on advertising techniques to bring in new customers.

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 for Starting a Pawn Shop

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

Step 1: Write a Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan.  Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related: How to write a business plan

Step 2: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a pawn shop, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 3: Name the Business

Finding the perfect business name can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a pawn shop

Step 4: Select your Location

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’ 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 5: Register for Business 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. 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 the 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.
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.

Additionally, there will be general business registrations to research such as a business license, sales tax permit, Employer Identification Number (EIN), and Occupancy Permit.

Related: Common business licenses, permits, and registrations by state

Step 6: 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.  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 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

Targeted, deliberate marketing can help pawn shops to reach their ideal audiences. This marketing may take the form of having an active social media presence and website, as well as using print advertising and even direct mail to reach lower-income individuals with the goal of having those individuals take out loans. A pawn shop also needs to market the items that it has for sale.

As the market for used merchandise expands, many pawn shops are turning towards setting up their own website to sell items.  This often helps to sell inventory faster at a better price as shops can reach more potential customers. Many businesses use online marketing platforms like Craigslist, social media, and eBay since these online platforms are free or low-cost.

Related: Low-cost ideas to market a new business

One important task while working on the marketing is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 9: Get Business Insurance

There are several types of insurance to consider when starting a pawn shop. A few of these include:
– General liability insurance protects the business if a customer is ever injured while on the property, like by a slip or a fall. This type of policy usually covers costs like legal fees or medical bill expenses.
– Commercial property insurance protects the business if an event like a fire ever damages its inventory, equipment, or building.
– Worker’s comp insurance helps to cover expenses like medical bills or lost wages if an employee is ever hurt while on the job.

The cost to insure a pawn shop varies depending on factors like the business’s location, the value of the building and its inventory, and the number of employees a business has. To get the best idea of what insurance will cost, review quotes from multiple insurance companies. Be sure to pay attention to factors like coverage limits and exclusions, premiums, and deductibles.

Related: What types of insurance does a pawnshop need?

Step 10: Hire Employees

A shop’s owner may run a smaller, newer shop entirely by themselves, but at some point, a shop will likely need at least one or two additional employees. According to PayScale, pawnbrokers make an average salary of $46,000 per year, while sales associates make approximately $26,000 per year.

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.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a pawn shop?

One of the major challenges in starting a pawn shop is ensuring that you have enough funds to finance the initial loans and sustain the business until interest payments or item resale profits start coming in. On a smaller scale, you may be able to start a pawn shop for $15,000. Larger shops that receive high initial traffic will need larger budgets to fund loans and purchase inventory, and startup costs could be closer to a minimum of $50,000 or $75,000.

Some common startup costs for a pawn shop include:
– Computer and printer
– Cash register
– Lockable display cases
– Security system
– Signage

How much can a pawn shop owner make?

PayScale reports that pawnbrokers, who are presumably the owners of the shop, make an average of $46,000 per year. A pawn shop’s profits depend on many factors, including how long the shop has been in existence, the shop’s size, the effectiveness of the shop’s marketing, and even the state of the local economy.

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.

Are there grants to start a pawn shop?

It’s extremely rare to find a grant to start a pawn shop. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

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

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