Is a Pawn Shop a Good Business

by | Sep 14, 2021 | Small Business | 0 comments

When thinking of starting a new business venture, a pawn shop may not be the first idea that comes to mind—then again, for some people, perhaps a pawnshop seems the ideal business. After all, you pass by pawn shops all the time. Historically, pawn shops have done well as people are always looking to sell stuff and thus make some needed cash. Especially now, when economic times are tight in the wake of a pandemic, a pawn shop might not be a lousy business to enter. And reality TV series such as Pawn Stars have given pawn shops decent exposure. As with any new business, you want to make sure you understand what is involved going in.

In this article, we take a closer look at the pawnshop business to determine whether or not it is an excellent business to start right now.

People Always Need Money

As mentioned, people need money, regardless of the financial climate. Whether they need quick cash to tide them through or are looking to sell something of value to acquire something else of value, they are constantly searching for sources of money. And versus going through a lengthy bank process for a loan, going to a pawn shop is often a sensible way to get the funds they need.

So how exactly does a loan through a pawnshop work? A person will pay the pawnshop interest on an item until they wish to repurchase it. When the item is accepted, it will be of a more excellent value than the money given for that item in a loan. The interest charged can vary depending on the shop and the item in question—usually, the range falls between ten and thirty percent per month. The interest rates are pretty high, so the loan periods are generally shorter. The loans last about a month for most pawnshop transactions.

When a customer fails to make their interest payments on time or defaults altogether on such charges, the pawnshop will usually keep and subsequently sell the item being held. On the other hand, if the customer can maintain their interest payments and then ultimately pay back the loan, they will receive their item. For many people, the good thing about getting a loan through a pawn shop is that the pawnshop can only keep the item pledged as collateral versus going after any other personal assets should the borrower default. This is known as a non-recourse loan.

As far as starting a pawnshop business, you can generally rely on having repeat customers. And when it comes to loan repayment, the countrywide average hovers around a 75% success rate as far as people paying back the loan and retrieving their items.

What Pawnbrokers Need to Know:

When starting a pawn shop, you want to ensure that you are up to date on several things critical to your business. You need to know where current pricing for many item types falls. You need to know what you can potentially sell a given item for, which will let you know what you can offer the seller. You want to handle what types of things will not sell. Loaning money for unsellable items can get you in trouble if the person defaults on their payments. Therefore, you will be stuck with an object and thus lose money. There is a risk factor to owning a pawn shop. Much as a lender will do, to some extent, it would help if you weighed how risky a potential loan might be.

As a pawnbroker, your job, in large part, is to know the market. In other words, it is your job to take care of the leg work. Customers will come to you because they don’t want to go through the hassle of selling something on their own should they need to.

Have Valuable Items

Given the above, understand that the pawnshop business is also about sales. Yes, you give out funds for specific items you deem valuable. You also have to anticipate selling those items as there is a chance the person will not repay the funds. Which items are you going to feature? Which might draw people into the shop? Remember, people come to a pawn shop to look for things they might be interested in purchasing. How you set up your store and which items are front and center must be very deliberate and strategic.

Keep a Record of Items

The other issue that pawnbrokers frequently deal with that you might not have to face with other business ventures is that criminals utilize pawn shops to get money for illegally obtained items. Your record-keeping is going to be crucial. In many states, a pawn shop must record the names and addresses (among other info/) from all customers looking for a loan. In this way, you can give police the necessary information should it be discovered that a thief tried to sell a stolen item to your pawnshop.

The downside of starting a pawn shop is that such establishments often tend to be associated with a “lower” type of clientele. This, however, is not necessarily the case. Yes, on occasion, you may encounter a seedier deal, but by and large, the average pawn shops client is someone who is employed and who happens to need additional money to tide them over. There may be an unexpected bill, a medical expense they cannot pay, or car repairs needed. Given that they might not need thousands of dollars, a bank loan may be out of reach in light of their situation. They turn to a pawnbroker. As far as pawnshop buyers, these usually love to bargain hunt. A consumer can often find an item for as much as 50% off retail at a pawn shop. Going into the pawnshop business, you want to be sure you gain a big-picture understanding of what is involved.

First Union Lending is here to help.

We offer a variety of fast and flexible small business loans. Call today to learn about suitable options to help your pawn shop!