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 bad business to enter into. And reality TV series such as Pawn Stars, for example, have given pawn shops decent exposure. That said, 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 a good business to start right now.
People Always Need Money
As mentioned, people need money, regardless of the financial climate. Whether they just 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 cash. And versus going through a lengthy bank process for a loan, going to a pawn shop is often an expedient 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 buy it back. When the item is accepted, it will almost always be of a greater value than the money given for that item in the form of a loan. The interest charged can vary depending on the shop and the item in question—usually, the range falls somewhere between ten and thirty percent per month. As the interest rates are pretty high, the loan periods are generally shorter term. On average 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 payments, the pawnshop will then 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 back. 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. For one, you need to know where current pricing for a multitude of itemsitem types falls. You need to know what you can potentially sell a given item for, and this, in turn, will let you know hat you can offer the seller. By the same token, you want to have a handle on what types of items simply will not sell. Loaning money for unsellable items can get you in trouble if the person defaults on their payments. You will therefore be stuck with an item and thus lose money in the end. There is a risk factor to owning a pawn shop. Much as a lender will do, to some extent, you need to weigh how risky a potential loan might be.
As a pawnbroker, your job in large part is to know the market. 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. In other words, it is your job to take care of the leg work, so to speak.
Given the above, understand that the pawnshop business is also about sales. Yes, you give out funds for certain items you deem valuable. You also have to anticipate having to sell 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 do come to a pawnshop to look for things they might be interested in purchasing. How you set up your store and which items are front and center needs to be very deliberate and strategic.
The other issue that pawnbrokers frequently deal with that you might not have to face with other business ventures is the fact that criminals do utilize pawn shops to get money for illegally gotten items. Your record-keeping is going to be crucial. In many states, a pawn shop will be required to take names and addresses (among other info/) from all customers who come in 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, car repairs needed. Given that they might not need thousands of dollars and in light of their situation, a bank loan may be out of reach and so they turn to a pawnbroker. As far as pawnshop buyers—these are usually people who love to bargain hunt. Many times, at a pawn shop a consumer can find an item for as much as 50% off retail. Going into the pawnshop business, you just want to be sure you gain a big-picture understanding of what is involved.
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