Most people who want to open a pawn shop oftentimes think pawn brokers simply buy, sell, and trade secondhand goods. The main business of a pawn broker, however, is providing you short-term credit in exchange for your personal property as collateral for a loan.
There are three important factors you need to consider before heading into the pawn brokerage business.
Initial start-up costs may go towards things like:
- Building a solid pawn loan base
- Display cases
- Accounting software
- A computer
- Start-up inventory
- Back room
- Security system
- Qualified assistance
You also need to be able to operate with negative cash flow and minimal profits for several months, which means you need sufficient capital before you even open.
Starting a reputable pawn shop requires you have at least $100,000 in capital. You need to establish your anticipated expenses and expected annual gross revenue in order to calculate how much you truly need. Researching other pawn shops may help give you a better picture of the expenses and revenue you might bring in on your first year.
Use that data to determine what capital you will use. Personal loans, small business administration loans, or an investor are all viable options.
You also need to be able to test and identify authentic precious metals and gemstones. Most pawn shops can attest that at least 50 percent of the of items pledged for a pawn loan or offered for sale are fine jewelry. This means investing in the right tools as well as hiring an in-store authenticator of these goods to look into each piece sent your store’s way.
Consider setting up a good marketing system as well. That way, you will attract good return customers that will keep your pawn shop thriving.
Get a License
Pawn brokers need to follow a wide variety of federal, state, and local regulations. There are currently at least 14 regulations at the federal level alone.
In order to run a successful pawn shop, you need to comply with all regulations within the IRS code, the US Patriot Act, the Truth in Lending Act, and many others to the letter.
You must also obtain a pawn brokerage license. Most pawn shops are licensed at a state level while others just at a local level. Many shops are licensed at both levels.
You will also need many different types of licenses, including:
- A precious metal dealer license
- A secondhand dealer license
- A general business license
Different states require different licenses, so it is important you look up which ones you need before opening up a local pawn shop in your area.
Pawn shops must keep a minimum distance requirement from schools and other similar establishments. It might be a good idea to take over an older pawn shop to minimize any need for location scouting, zoning approval, and additional permits.
If you can’t, contact your city’s planning department to help you find a suitable location for your pawn shop.