OPENING A PAWNSHOP
The NPA has had many entrepreneurs contact us
who state they are planning to open a pawnshop
and are seeking our assistance. In talking to
them, we discover they are most interested in
buying, selling and trading second-hand goods.
They are shocked to discover this is not the main
business activity of a legal licensed pawnshop.
We always suggest they consider opening a
second-hand store, as opposed to attempting
to meet the requirements to become a licensed
pawnbroker. This is important for you to realize
and understand fully.
The main business activity of any pawnshop is
providing short-term credit to consumers who,
in turn, pledge personal property as collateral
for the pawn loan. Simply stated; if you do
not want to be a money lender, you should not
choose to be a pawnbroker.
OPENING A PAWNSHOP
Most “wannabe” pawnbrokers
are overly concerned
about filling up their
showroom with used
merchandise before opening
their business. While I’m not
suggesting you open a pawnshop with an empty showroom,
I would suggest there are many more important aspects to
opening a pawnshop that should concern you first. First, You will need to
you will need to have sufficient capital after your initial have sufficient
startup costs to begin building a solid pawn loan base and capital after your
to operate with negative cash flow and minimal profits for
initial startup
several months.
costs to begin
Another thing you will need immediately, before the front building a solid
door opens for the first time, is sufficient knowledge and pawn loan base
tools to test and identify precious metals and gemstones. and to operate
In most pawnbroking operations, fine jewelry accounts for
with negative cash
over 50% of items pledged for a pawn loan or offered for
sale.
flow and minimal
profits for several
If at least someone in your business cannot identify a months.
diamond from a moissanite or a solid gold ring from a
heavily plated ring, you will have an extremely difficult
road ahead of you. Plus, you should also consider having a
marketing system in place to attract qualified customers
into your pawnshop and keep them returning again and
again.
OPENING A PAWNSHOP
Becoming a pawnbroker causes you to fall under a wide variety
of federal, state and local regulations. There are currently 14
regulations just at the federal level. Compliance with these
regulations is not optional. Regulation within the IRS code,
the US Patriot Act, the Truth in Lending Act, and many others are to be followed to the
letter. In most cases there are severe penalties for operators not in compliance with these
federal regulations. Your shortcut to compliance will be to become a member of the National
Pawnbrokers Association because this organization is always knowledgeable about the latest
in federal requirements for the pawnbroking industry.
Most pawn shops are licensed at a state level, while some are licensed only at a local level, and
many are licensed at both. There is no such thing as becoming a pawnbroker without some sort
of business licensing, and usually this involves multiple licenses. Depending on your location,
you will need a pawnbroker’s license, a precious metal dealer license, a second-hand dealer
license and a general business license.
It is your responsibility to find out what licensing your pawnshop will
require, knowing all the regulations for your area, and applying for and
obtaining required licensing before doing business. One of your best
resources for this information will be your State Pawn Association.
Be aware, most licenses take time to obtain, and many have financial requirements attached to
them. While some of these financial requirements may seem unreasonable or restrictive to you,
they are in place to assist you in the success of your business. Attempting to open a pawnshop
business on a shoestring budget is a recipe guaranteed for disaster and failure.
OPENING A PAWNSHOP
The regulations you fall under based on your choice of location
will have a major impact on how you choose to do your
business. Maximum finance charges, minimum holding times,
unredeemed pledge disposal, and many other important business metrics are regulated by
these statutes and need to be complied with. These limitations always vary from state to state
and sometimes from city to city. These limitations can also make it very difficult to profitably
run a pawnbroking business under certain circumstances.
Understanding limitations before investing in your pawnshop business is of great importance
to you. An example would be if you happen to live in, and choose to operate in, a low-interest
state such as Ohio, and you wish to locate your pawnshop in a rural community of under 10,000
people. It should be obvious that you will never be able to meet your overhead on the finance
charges collected off the effective yield of your loan base. Many additional products and
services to generate additional revenue streams would be required for such an operation to
run profitably.
In most areas there are strict requirements on forms to
be used when conducting business in a pawnshop. The
strictest requirement is in the content necessary on the pawn loan document, or pawn ticket.
Your pawn ticket must meet or exceed all information clearly spelled out as required by federal,
state and local regulation. Generating pawn loans without the required information on your
pawn tickets is an open invitation to fines, penalties and lawsuits against your business.
Most areas also have requirements on forms to be used when purchasing merchandise from
customers, taking trade in merchandise from customers, and even occasionally when selling
items at retail. Your shortcut to compliance here is to locate and do business with a forms
printer who specializes in forms exclusively for the pawnbroking industry. These companies
aggressively stay informed of all the current federal, state and local regulation required on the
forms they produce.
OPENING A PAWNSHOP
Make an appointment with the chief law enforcement officer in your
market area to discuss your pawnshop business plan with him or
her. Ask them what reporting requirements are in
place within their department for pawnshop
businesses and encourage electronic reporting to the police department as an option if they
currently do not have this available. Your State Pawn Association and your software provider
will be excellent sources for up-to-date information on electronic reporting.
Discuss with law enforcement the procedures you will have in place for screening prospective
customers and keeping the amount of suspect property accepted by your pawnshop to a
minimum. Also, talk with them about their standard operating procedure for what happens if
property accepted by your pawnshop is found to be suspect in nature. This does not necessarily
mean the property is actually stolen. Usually when property accepted by your pawnshop is
misappropriated by the customer it will be a civil matter, as opposed to a criminal issue.
It is wise to understand consequences and outcomes in this area before a problem exists because
of misappropriated property. Be sure to question procedures about domestic disputes, and
property procured from rent-to-own stores. Also, discuss the appropriate course of action for
holding property during investigations, potential criminal charges against the customer, and
restitution provided to you by either the courts, the insurance companies or the victim. There
is no one-size-fits-all method to protect yourself against suspect property, but there are many
laws in place to allow you to remain whole.
Again, we highly recommend utilizing your
network of fellow pawnbrokers to learn the
best practices regarding the ability to handle
property disputes and law enforcement
claims quickly and hassle-free.
OPENING A PAWNSHOP
Almost every successful pawnshop
that’s been in business over 20 years
is doing well for a specific reason.
The reason may be the business
is generational, and the current
operator learned the business from
a family member. The reason may also be the pawnbroker initially
purchased an existing successful pawnshop business when getting
into the industry.
If a pawnbroker has been successfully in business for over 20
years from a fresh startup with no initial pawnbroking experience,
they should be applauded. I can almost guarantee they struggled
If you want to
mightily to get there. This is because 20 years is a long time, and be successful
the pawn industry has come a long way. When they initially entered in the pawn
the industry, there were virtually no resources available on owning business, you
and running a pawnshop, but times have changed. The pawnbroking will be part of
industry is now professionally organized with state and national both your state
trade associations that are valuable resources for information and federal
to the inexperienced pawnbroker. If you want to be successful in associations.
the pawn business, you will be part of both your state and federal
associations.
The pawnbroking industry also now has how-to books, coaching
programs, qualified consultants and industry experts available to
you for consultation. Your investment in these types of resources
will have a positive impact on your initial startup and ongoing
pawnshop business. Utilizing them wisely produces results. Nearly
every available resource will provide you with greater financial
security for your new business and will also assist you in avoiding
many costly mistakes. They are an investment in your peace of
mind.
OPENING A PAWNSHOP
Carrying out While the pawnbroking
appropriate research before entering any industry has been around
new industry is always a wise activity. In for over 3,000 years, there are many things
order to be confident, the pawnbroking it still does not do correctly. While you have
industry is right for you, you may wish to the advantage of plugging in estimated
consider immersing yourself in industry percentages and margins in your business
information before investing in your future plan based on Annual Reports and SEC filings
business. This due diligence can easily be of the public companies in pawnbroking,
accomplished in a number of ways. this does not mean you should model your
operation after them.
Take several days to visit as many
pawnshops as you possibly can, both inside We have found your best bet is to visualize
and outside of your market area. Take note your typical customer standing in front of
of what you feel they are doing right, and you, the customer you wish to attract, and
more importantly, what they might be doing then create a unique, fun and interesting
wrong. Attend industry trade shows, if experience for this customer. Think Neiman
possible. Not only will you make important Marcus® and not Walmart®. Do not,
future business contacts, but your however, make the grave error of totally
attendance will accelerate your learning outclassing your customer base. You do not
curve of a new industry. want to put a high-class pawnshop in a lower-
income neighborhood or vice versa. Again,
Read books on the industry to acquire just keep in mind the customers you wish
additional knowledge of what takes place to attract, hopefully within your radius, and
in the business. Subscribe to industry trade make sure their experience when dealing
publications and inquire if any back issues with your company is not boring.
might be available. Look up and study
pawnshop industry news available on the
Internet. Doing as much of this research as
possible before opening your pawnshop will
clear up many misconceptions and irrational
expectations you may have.
OPENING A PAWNSHOP
If you have yet to find a location for your pawnshop, one of the
most important things to consider is the type of customer you
wish to attract and the size of loans you wish to write. As a rule
of thumb, over 80% of a pawnshop loan base will come from
within an 8-mile radius of the location. This, of course, varies depending on marketplace, with
the circle growing wider in rural locations with lower population density, and the circle growing
narrower in urban areas with high population density and increased competition.
Keep this 8-mile, 80% rule in mind in choosing a location that will have the ability to attract
customers you desire. If you have already chosen a location, draw a circle on a map representing
this 8-80 rule, and concentrate the majority of your marketing on those who live within the
radius of your circle. Catering to the types of residents who live within the circle will show you
the most bang for your buck in your marketing efforts.
The boilerplate joke for opening a new pawnshop location is the question: “Well, what are you
going to run out of first? Will it be storage space, or cash?” This is because while you have
inventory for sale in the form of purchased goods, trade-ins and defaulted loans, operating
a pawnshop in a successful mindset will reveal that your true inventory item is nothing more
than cash.
When you are in the business of renting money, the last thing you want to do is run out of it. An
aggressive lending practice in any pawnshop is an important key to the success of the location
and is difficult to do on a limited budget. Therefore, in your business plan, it is important to spell
out your estimated default rate on your loan base (usually around 25%) and your estimated
effective yield on your income producing loans. This makes it much easier to sell the idea to
your investor on borrowing cash from him at 10% per year and loaning it out to your customers
at a return of 10% per month.
OPENING A PAWNSHOP
Some of the most successful pawnshop operations I have
witnessed recently have had the front room laid out like your
typical variety store with a comfortable and inviting feel to
it. Then, somewhere in the layout of the front room is the
loan area which looks like your usual small bank branch in
a grocery store. Keeping traffic patterns and security in mind, this will give your pawnshop a
warmer and friendlier feel than a big-box store ensuring that your customers feel safe while
doing business with you.
Just think clean and comfortable
for your customers and you will do
just fine.
It is important to choose colors, displays, flooring, lighting, signage and finishes based on what
will make your desired customer comfortable. It is wise to have the classiest part of your front
room be your retail jewelry area, followed by a private closing room which will allow you to
successfully negotiate loans with higher end customers, if this type of customer is what you
desire and market to. Just think clean and comfortable for your customers and you will do just
fine. But remember that a “same as” mentality is not helpful here. Look to provide a legitimate
and profound reason why your customers should do business with YOU.
OPENING A PAWNSHOP
All pawn shops, especially new startups,
experience periods of negative cash flow. The
months of January, July, and August are usually
the most prevalent. November, December and
February usually see the most positive cash
flow periods. You will also experience more
dramatic ups and downs in your loan balance All pawn shops,
during these months. especially
Other occurrences, usually less predictable,
new startups,
will also have dramatic effects on your cash experience
flow. Some of these occurrences may include periods of
local economic conditions, large layoffs or negative cash
factory closings in your area, seasonal work in
your market area, exceptionally cold winters or
flow.
hot summers, and even the current price of a
gallon of gasoline. You should prepare for this
in laying out your business plan, and you should
also propose additional revenue streams to get
through these negative cash flow times with
supplementary desired goods and services
offered to your typical customer.
OPENING A PAWNSHOP
At risk of Store security is of utmost importance to
sounding your pawnshop operation and should be
harsh, hiring employees with previous included in your business plan. This is no
pawnshop experience usually means place to cut corners, and proper security
you’re hiring a person who has been trained measures will provide confidence to your
improperly and is typically not open to loan customers that their pledged items
accepting and properly implementing the are being stored securely. If possible, it
systems and processes in place at your is wise to avoid cages, screens, bars and
pawnshop. Previous retail experience bulletproof glass. This will, of course, need
is usually a plus, as is previous military to be determined depending on your exact
experience. location.
Former jewelry store employees along At all costs, avoid employees visibly carrying
with former rent-to-own store employees weapons. If you feel it is necessary in your
also seem to be a good fit. People with location, you have chosen the wrong location.
backgrounds in banking and finance will also You should plan on a minimum of TL-TR30
work to your advantage. The opportunity to safes for jewelry and cash storage, which
hire a graduate gemologist is almost always should also help you with your insurance
a plus and may give you the opportunity for rates. Full store parameter and interior
an additional revenue stream. I have also state-of-the-art alarm systems
found that hiring retired police officers are necessary and should be
provides valuable previous experience for a planned for. So is a full
new pawnshop employee. store state-of-the-art
surveillance system.
Make sure to include in your business plan Opening a pawnshop
a procedure for background checks, credit without these minimum-security measures
checks, and drug tests for new hires. is foolish.
OPENING A PAWNSHOP
In operating a pawnshop, your overhead will contain expenses
that far exceed that of an ordinary lender or retailer. Insuring your business, especially carrying
insurance on all pledged items, is not only expensive, but in most cases, is required. Keep in
mind it will not be easy or economical for you to obtain an adequate business insurance policy
on your pawnshop. Most underwriters refuse to even cover the industry.
There are several insurance companies who specialize in writing policies for the pawnshop
industry. These companies can be located through trade associations and also in industry
trade publications and trade shows. Determine the approximate cost of this ongoing business
expense when calculating your cash flow in your business plan. In addition, determine how much
risk you are willing to assume in the event of a loss.
Another ongoing expense that surprises most new pawnbrokers is the cost of adequate
security for your pawnshop business. Crimes against pawnbrokers are sharply increasing and
state-of-the-art security for your pawnshop business should be considered a necessary and
ongoing business expense. Your business and your life may depend on it.
Determine the approximate cost of this
ongoing business expense when calculating
your cash flow in your business plan.
OPENING A PAWNSHOP
Takingthetimetosetupadvancedtechnology A back-room storage system for pledged
systems for a pawnshop operation is not merchandise is something that is usually
only necessary but will ensure your success. overlooked in a pawnshop business plan.
There are several excellent computer If you are limited in the amount of pledged
software systems designed exclusively for goods that you can store, you are also
the pawnbroking industry, and you should limited on what you and your employees
consider computerization mandatory no can accomplish building your loan base.
matter what size your operation is. It would Jewelry storage is usually the easiest to
be wise to choose your preferred software accommodate, and the majority of jewelry
and mention it in your business plan. pledges can usually be filed in the safe using
a No. 1 coin envelope.
Additional systems should be set up
for every procedure that takes place in
your pawnshop. Loan procedures, sales
procedures, management, hiring and firing, Warehouse shelving generally works best
and even procedures on how to properly on an alphanumeric system, and shelf
answer the telephone. Again, this is of major space should vary to hold different sized
importance, even if you have no employees items without wasting space. If possible, I
yet. recommend floor to ceiling shelving in the
warehouse while keeping safety in mind.
You will find it much easier to lay out the Smaller items pledged together can easily
systems if you begin with the end in mind. Try be stored in Ziploc bags, and your computer
to consider your pawn shop running without system should be able to accommodate you
you being there, or without you being in the for tags or labels on all pledged merchandise.
picture at all. How do you want things done? When it comes to storage, think fast, safe,
How do you want your customers to be simple and accurate, but also try to utilize
treated? every cubic foot you have.
OPENING A PAWNSHOP
While determining the fair market value on the majority of pledged items is a simple task
nowadays by using the Internet, it would be wise to include in your business plan intentions
to have the education, contacts, or reference materials required to value a wide variety of
specialty items. The more versatile you can be in valuing the items offered as a pledge, the
more creative you can be in building your loan base.
It is also important to seek out proper education to be able to authenticate expensive items
such as high-end watches, vintage jewelry, designer brand goods, antiques and other luxury
items that are frequently knocked off. Most pawn brokers repeatedly lose out on amazing
amounts of additional revenue because they lack the ability to be able to separate the faked
or copied from the real thing. Do not fear this important investment of resources for your
pawnshop. Receiving appropriate training will pay you handsomely.
Many new pawnbrokers feel they are at the mercy of their walk-in customers for what types
of products and services they should offer in their pawn shops. Besides the obvious product of
short-term consumer credit, many highly successful pawnbrokers also specialize in additional
product areas resulting from a hobby or interest of theirs. I have personally witnessed
pawnshops that also deal in products as diverse as valuable one-of-a-kind art, collectibles,
antiques, vintage model trains, and even wedding dresses.
Specialized items such as these in a pawnshop will attract like-minded customers. Keep in mind,
they will also attract more items like them which customers will offer for pawn or for purchase.
So, if your hobby or interest is a unique type of merchandise that has a high perceived value, it
may work very well as an additional revenue stream in a pawnshop. Steer clear of items with
unstable values sold by the mass merchandisers.
OPENING A PAWNSHOP
While a well-written business plan will
provide you with
a blueprint for
the operation of your pawnshop business, adding flexibility
to this plan will also help to ensure your success. In any
economy, many factors may change quickly and can have a
Ultimately,
major impact on your business. The precious metals market, flexibility in your
the latest unemployment figures, your local economic business plan will
situation, and the fair market value of the most common provide you with
merchandise are not within your control.
an opportunity
Ultimately, flexibility in your business plan will provide you to make
with an opportunity to make adjustments quickly. While adjustments
typical loan-to-value ratios are generally in the 25% to 50% quickly.
range, you must be willing to promptly adjust them to best
serve your customers while protecting the amount of risk
your pawnshop assumes.
As with starting any business, there are always risks that
will be taken, but by following these tips for opening a
pawnshop, any risks you take will be far more calculated.
