How To Open a Pawnshop

Before opening your own pawn shop, you'll want to prepare thoroughly. Laws and regulations around the pawnshop industry can make it a challenging space to enter. Understanding the market is also key. Knowing what items are in demand, how to appraise valuables, and how to attract and retain customers will be central to your pawnshop's success.

This article will guide you through the business planning and legal steps to open a pawnshop business. See FindLaw's Small Business Law section for more information and resources on starting and running your small business.

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1. Research the Pawnshop Industry and Evaluate Your Business Idea

Pawnshops are sometimes scrutinized for their role in the resale of stolen goods. But most pawnshops are reputable businesses. Pawnshops do more than sell secondhand items. They also offer consumers an option for short-term cash loans without a credit check or income verification.

Many who use pawnshops for small collateral loans are unbanked or underbanked. This means they rely on alternative financial services outside of the traditional banking system.

Most pawnshops generate a profit in two ways:

• Money lending, or the interest charged for short-term loans
• Reselling unredeemed inventory for a profit

Some pawnshops offer other income-generating services, like check cashing, cell phone activation, and money transfers.

How profitable your pawnshop is depends on what you sell, your clientele, and your overall business model. Some typical items found at pawnshops include:

• Electronics
• Collectibles and antiques
• Jewelry
• Guns
• Tools
• Designer goods (purses, handbags, shoes, and clothing)
• Sporting goods
• Musical instruments

Because of the value of your inventory, you'll also need to consider aspects like full-time, on-site security.

Take some time to consider your options. Assess your financial situation and personal needs. You'll be investing considerable time and money into this venture, so discuss your goals with your family, partner, and any others with a stake in your finances.

2. Understand the Laws and Regulations for Pawnshops

Pawnshops are subject to federal, state, and local regulations, with requirements varying depending on your area. Here are a few of the federal regulations to know:

• The USA Patriot Act requires anyone transacting with a pawnshop to have a valid government-issued photo ID.
• The Truth-in-Lending Act promotes loan transparency and protects consumers from shady credit practices.
• The Equal Credit Opportunity Act protects consumers from discrimination based on factors such as race, gender, and religion.
• The Bank Secrecy Act regulates all money service businesses (MSBs) in the U.S.

You'll also need to know which licenses your local area requires for pawnshop. This is discussed in more detail in Step #8.

First, check with your local government to determine what's required in your city or county. Then, research state and federal regulations like the ones bulleted above.

If understanding the regulations at play overwhelms you, you can get help from a local small business attorney.

3. Draft a Detailed Business Plan

A well-drafted business plan is where you put your vision for your pawnshop on paper. This planning phase will help you organize your business goals and your strategies to achieve them. It will also guide your decision-making and help you manage and grow your shop.

Your business plan will also help you plan and prepare for worst-case scenarios. The pawn loan business is known for its highs and lows. So, you'll want a flexible game plan that fits into several economic scenarios. Here are some questions to consider as you draft your plan:

• What services will your pawnshop provide?
• What is your pawnshop's business name, and where is it located?
• Will you lease commercial space for your pawnshop or buy a property?
• Are you the sole owner, or do you have partners in your business?
• Which legal business structure will you choose when you register your business?
• How will you finance your startup costs?
• What is your contingency plan for downturns when the business is making less profit?
• Who are your competitors, and is there a market demand for another pawnshop in your area?
• What is your target market, including demographics and buying habits?
• How will you advertise and promote your store?
• How will you price your inventory? (Use eBay, Craigslist, and auction sites to see what comparable items sell for)

The U.S. Small Business Administration (SBA) has free online templates you can use as a guide.

Be as detailed as possible in your plan. You'll refer back to it as you operate and grow your business.

4. Get Financing for Your Pawnshop

In general, pawnshops don't require a significant amount of startup capital to open. Some owners open their pawnshop for as little as $10,000. But you should invest significantly more than that to keep your business secure and growing.

You'll need capital for your initial costs and ongoing expenses. Plan to invest in the following:

• Location costs (commercial lease or mortgage)
• Any necessary renovations
• Initial capital to offer loans and inventory to sell
• Utilities
• Business registration and licensing
• Insurance premiums
• Security system
• Staffing and payroll
• Display cases
• Point-of-sale (POS) software
• Office equipment
• Marketing and advertising

Factor in professional fees as well if you get help from a business attorney, marketing expert, accountant, or other professional.

Many new businesses look to their personal capital and outside sources like a bank or investing partners. This is another reason you need a robust business plan. Investors and lenders will assess the strength of your plan (especially your market research and financial projections) to determine business loan or investment options.

5. Choose a Business Structure and Register your Business

As a new pawnshop owner, one of the most crucial steps you'll take is registering your business with your state's regulatory authority (usually a secretary of state). Registering your pawnshop with the state officially acknowledges your business's existence and legitimacy. This formal recognition establishes your pawnshop as a credible and lawful business entity.

During this process, you should also decide on the legal structure for your business:

• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• Corporation

The default entity is a sole proprietorship (if you are the only owner) or general partnership (if your business has more than one owner). If you don't choose a different entity, the state will recognize your business as such. With sole proprietorships and partnerships, the state views you and your business as a single entity. This means you report business profits and losses on your personal tax returns, and your personal assets are at risk if someone sues your business.

While these structures are the most straightforward and require the least paperwork, carefully consider if you're prepared to risk your personal assets (like your bank account, house, and vehicle) in case of a lawsuit against your business.

Conversely, LLCs and corporations offer limited liability protection. This means your personal assets are protected if someone sues your business or it incurs debt.

LLCs are easier to set up than corporations, cost less to maintain, and are generally less regulated. Smaller businesses whose owners enjoy more flexibility tend to structure as LLCs. They also have the benefit of pass-through taxation. This means you report business income or losses on your personal tax return instead of paying taxes on its income.

Corporations are generally reserved for larger entities with multiple shareholders. They have stricter regulations and are subject to double taxation. This means you pay taxes at both the corporate and individual levels. If you structure your business as a corporation, you can apply for S-corp status with the IRS to avoid double taxation.

It is possible to convert your business from an LLC to a corporation later.

Registering as an LLC or corporation requires initial registration and renewal fees. These fees are nominal, typically not more than a few hundred dollars for LLCs.

6. Get Your EIN From the IRS

Next, you'll need a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Your EIN is like your business's Social Security number. The IRS uses these for tax and identification purposes. You will need your EIN before you can:

• Open a business bank account
• Hire employees
• File federal tax returns
• Apply for certain business licenses and permits

The IRS issues EINs for free. You can get yours instantly by applying on the IRS website. Watch out for third-party sites charging a fee for an EIN—many of them look like the official IRS website.

7. Open a Business Bank Account and Line of Credit

Opening a business bank account is critical to protect your personal assets. Commingling (mixing) your business and personal finances can put your personal assets at risk in the event of a lawsuit against your business. Keep your accounts separate and use the appropriate accounts for all business transactions.

You may also want to take out a business credit card. You can use this line of credit towards ongoing and unexpected expenses. This is also a great way to build your business credit, which can lead to more favorable lending opportunities in the future.

Thoroughly research several credit cards' terms, fees, and interest rates. Some corporate credit cards also offer cashback and other rewards.

8. Apply for Necessary Business Licenses and Permits

The specific licenses and permits required for your pawnshop depend on its location and scope of operations. But you'll likely need the following:

• Pawnbroker license
• Precious metal dealer's license (if you intend to trade in jewelry)
• Secondhand dealer's license (required in some areas to sell secondhand goods other than cars)
• Federal firearms license from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) (if you sell firearms and guns)

Other standard business licenses and permits you may need to plan for include:

• Sales tax permit
• Zoning permit
• Certificate of occupancy (CO)

These licenses are subject to fees for filing and renewal. Check with your state's small business authority to determine costs in your area.

9. Join a Pawnbroker's Association

While not mandatory, joining a pawnbroker's association has certain benefits and opportunities. Here's how these associations can help you as a pawn business owner. They can:

• Update you on upcoming legislation and changes in regulation
• Lobby in the interests of pawnbrokers at a local and federal level
• Connect you with peers in a non-competitive setting, offering insight into industry customs and trends

Consider the National Pawnbrokers Association and state associations. Shop around to determine which association fits you and your business.

10. Create Procedures for Tracking Inventory and Stolen Items

Before opening your pawn shop, you'll need a plan for tracking items bought and sold by the business.

Be aware that some property brought into your shop might be stolen. Pawnshops often work with local law enforcement when customers attempt to pawn items of legal significance. Here, you'll need to be as open and transparent as possible.

While stolen items are an unfortunate aspect of brokering, you can reduce the risk of handling stolen property by diligently tracking items when they're in your possession. Developing a positive relationship with local law enforcement can further protect your pawn shop from becoming inadvertently involved with stolen merchandise.

Pay close attention to the details of items brought into your shop—especially electronics and jewelry. Check and record everything about them. Include where they come from, who's selling them, and any inconsistencies in an item's history.

Come up with a chain-of-custody strategy for all property held in your pawnshop. This also means tracking which employees worked with which items and their current location in your inventory. Most pawnshops now use sophisticated software systems to track their inventory. These electronic reporting systems are standard in the industry, and any diligent pawnbroker should have one.

11. Find a Storefront

Your commercial rent or mortgage will likely be your most significant startup and ongoing expense. Consider your business budget and keep in mind that economic downturns may impact your profitability.

Research competitors in your area. To avoid oversaturating the market, look for a location at least eight to 10 miles from other pawnshops. Find a locale with significant space for:

• Salesfloor
• Lending area
• Inventory storage

Keep your target market in mind during your search. Your shop's location should be accessible and convenient for your potential customers to access. You'll also need to confirm that your municipality has zoned your location for commercial use.

12. Hire Staff for Your Shop

You'll need to hire a trustworthy team to staff your store. Look for candidates with pawn or pawn-adjacent (jewelry store or bank) experience. Any type of customer service background is also helpful.

Consider performing background checks on all employees.

Post detailed, effective job descriptions on online job boards like ZipRecruiter and Indeed. You can also use LinkedIn to look for candidates. If your shop is open late and on weekends, be sure to state these availability requirements in your job descriptions. This will save you time during the interview and offer phase of the hiring process.

Review hiring and employment laws before you start the hiring process. For example:

• Go over restrictions on employing minors
• Verify every employee's identity and eligibility to work in the U.S.
• Know the unlawful questions to ask in a job interview
• Review workplace discrimination laws
• Distinguish between employees and independent contractors

13. Install a Security System

Invest in a reliable security system, but keep in mind that customers don't enjoy visiting a shop with bars and cameras. Try to strike a balance between customer experience and protecting your inventory. You'll also want to buy tools to test the value and authenticity of jewelry.

Prepare for ongoing security costs. You may also need to hire security guards or a company to provide them. You'll also need to upgrade your systems as the business grows and the industry evolves. A good security system will help protect your assets and your staff.

14. Get Business Insurance for Your Pawnshop

Insurance is essential to any pawnshop—think of it as a layer of security for your business. Some companies specialize in insurance policies for pawnshops, offering coverage bundles that work well for pawn businesses. Recommended insurance typically includes general liability and property insurance.

Check with your local pawnbroker's association for recommendations on insurance carriers in your area. An insurance broker or business attorney can also advise on types of insurance for your business.

If you have employees, your state likely requires you to carry workers' compensation insurance. This covers medical costs and lost wages if an employee suffers an injury on the job.

15. Market and Promote Your Pawnshop

Your target audience should inform your marketing efforts. Build your marketing plan around strategies that will reach and resonate with your audience. Your methods should attract customers to your new pawnshop.

Most effective marketing plans combine both digital and traditional strategies.

A user-friendly, accessible website is a must. You may need to hire a web developer to do this. Once you have a website, create a Google Business Profile and list your business on Google Maps and Search. Use search engine optimization (SEO) strategies to boost your website's visibility in search engines.

Create a strong social media presence. Post engaging, informative content—not just sales and promotional posts. Your goal should be to connect with your audience authentically.

If your budget allows, consider hiring a graphic designer to create a logo and other aspects of your branding. Use this on your website, signage, and promotional materials.

Traditional channels like direct mail, print and radio ads, and word-of-mouth are still effective, too. Again, keep your target audience in mind when formulating your strategy. You may have to adjust your efforts as you go to see what works best.

Review the Truth in Lending Act before you launch your marketing campaign. Ensure your ads disclose your credit terms lawfully. Further, truth in advertising laws prohibit you from making misleading or exaggerated claims about the value or authenticity of an item.

Get Legal Help With Your Pawnshop Business

Owning and operating a successful pawnshop takes a dedicated owner who closely manages the business. Having a local small business lawyer on your side means getting answers to your questions as soon as needed. Consider contacting one at any stage of your business's creation.

Another option for legal help with your business is FindLaw's simple DIY business formation process. This online tool will guide you through each step of your business formation and help ensure you meet all legal requirements.