How to Open a Pawnshop
Pawnshops serve a variety of functions in a community. Many people think of pawnshops as a place to both buy and sell secondhand items. But really, these stores do so much more. A pawnshop's primary function is lending through short-term loans. And the laws and regulations around the industry can make it a challenging space to enter.
If you're planning on starting your own pawn shop, you'll want to be prepared. A highly motivated entrepreneur who knows the pawn industry's ins and outs has a much greater likelihood of success.
This task is going to require a substantial amount of patience. There's a long journey ahead before you'll be able to make that first transaction with a customer, so take your time to ensure as lucrative a venture as possible.
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1. Think It Through
Before you take your first steps on the path to opening your shop, take a minute to consider your options. A new business owner must consider their financial situation and their personal needs. You'll be investing a considerable amount of time and money into this endeavor, so you'll want to discuss your goals with family members or significant others that have a stake in your finances.
You'll also want to consider the pawn-brokering business at large. The money lending business is subject to economic highs and lows, and some periods will be better than others. It would be best if you were wise with your money during upturns so you can comfortably ride through the downturns. And you'll need to consider aspects like full-time, on-site security for your business.
2. Do Ample Research on Pawnshops and How They're Regulated
As you might've already discovered, there are many misconceptions about pawnshops and how they operate and make money. A pawnshop's leading source of income is not from the goods it buys and sells. Successful pawnshops derive their most significant source of income from moneylending. Make sure you're well-informed before you start designing your for-profit business.
You'll also need to rely on this research when figuring out which licenses are required in your local area. Pawnshops are subject to regulation by federal, state, and local governments. That's a lot of law! And requirements can be different depending on your area. Here are just a few of the federal regulations to be aware of:
- USA Patriot Act: This regulation requires anyone who transacts with a pawn shop to have a valid government-issued photo ID.
- Truth-in-Lending Act: This act promotes loan transparency and protects consumers from shady credit practices.
- Equal Credit Opportunity Act: This is a regulation that protects consumers from being discriminated against based on factors like race, gender, and religion.
- Bank Secrecy Act: This law regulates all money service businesses (MSBs) in the U.S.
For this step, check with your local city government first to determine what's required in your specific area. You can obtain this information by visiting your local government's website or city hall. It's also worth checking out the wealth of business information available at your local library. From there, branch out to consider state and federal regulations like the ones listed above.
The vast amount of information required for this step might seem a little daunting. If you're feeling overwhelmed and having difficulty finding answers, consider speaking with a local small business attorney with experience in this area.
3. Draft a Highly Detailed Business Plan
Here's where you get to start putting all that research into action. The importance of a well-drafted business plan cannot be emphasized enough. This is the part where you put your vision for your pawnshop down on paper. And you'll want to leave no stone unturned in this planning phase.
Dream big, but also consider worst-case scenarios. This is a business of highs and lows, so you'll want to have a flexible game plan that fits into any situation. Here are some questions you must consider as you begin drafting your plan:
- What services will your pawnshop provide to its customers?
- What is the name of your pawnshop?
- Where will your pawnshop be 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 entity structure will you choose when you register your business with the state?
- How will you finance the opening of your pawnshop?
- What is your contingency plan for downturns when the business is making less money?
- Who are your competitors, and is there a market demand for more pawnshops in your area?
- How will you advertise your store?
Once you've compiled detailed answers to these questions, it's time to start writing. Drafting these plans are made more accessible by the many templates available online. Keep your plan organized because you'll need to return to it from time to time!
4. Acquire Financing for Your Pawn Shop
This may come as a surprise, but pawnshops do not require a significant amount of money to open. There are fees for registering your business and obtaining licenses, as well as location costs, but you can open a pawnshop for as little as $10,000. This amount, however, is not recommended at all. The fact is, you'll want to invest significantly more than that amount to keep your business secure and growing.
Many new businesses look to their personal capital and outside sources like a bank or investing partners. Take your business plan into your local bank and sit down with a representative. They'll assess the strength of your plan and discuss any loan options available to you.
5. Register Your New Business as a Legal Entity
One of the most crucial steps any business owner can take is registering their business with a state regulatory authority (usually a secretary of state). Here are just a few benefits afforded to your business by completing this step:
- You can shield your personal assets from any debts or obligations raised by your business (note that this shield does not extend to an owner's conduct).
- You will be able to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
- With an EIN, it will be easier to hire employees.
- It will also be easier to open a business bank account so that you can build your pawn shop's credit.
If you're thinking about a minor operation, limited liability companies (LLCs) are a great form when you're starting. They are easier to set up than corporations, cost less to maintain, and are less regulated in general. This is not to discount corporations, though those are generally reserved for larger entities with multiple shareholders.
Note that you will be subject to registration fees and annual or bi-annual renewal fees after that. Thankfully, these fees are nominal and typically don't exceed more than a few hundred dollars for LLCs.
6. Get Your EIN From the IRS
And now for the easiest step of this entire process. Getting an EIN from the IRS is free and straightforward. These nine-digit numbers act as Social Security Numbers (SSNs) for businesses. They identify your business to the IRS to pay your taxes, and you're going to need one if you intend to hire employees or open a bank account for your pawnshop.
The IRS's website provides details on applying by phone, fax, or mail. But really, the quickest way to apply for an EIN is online.
7. Open a Business Bank Account and Maintain a Credit Line
Opening a bank account for your business is critical if you want to keep your personal assets protected. Mixing your business and personal finances can lead to legal peril in the event your business is sued. Keep them separate, and track all money going into and out of your accounts.
This is also the step where you'll want to seek a line of credit for the business. If you secured a loan to help finance the company, you should know that getting a line of credit is an altogether different step. You can put this line of credit toward wherever you wish in the business. Just remember to always pay your bills on time. Building a solid credit history can lead to better lending opportunities in the future.
8. Gather the Necessary Licenses and Permits to Open Your Pawnshop
If you've completed the research you began back in Step 2, it's time to file applications for all necessary permits and licenses to open your business. Depending on where you're located and what is required, you will need some or all the following:
- A pawnbroker's license
- A precious metal dealer's license if you intend to trade in jewelry
- A secondhand dealer's license is required in some locales, typically for all sellers of secondhand goods other than cars
Like when you registered the business, 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 by no means mandatory, joining a pawnbroker's association brings with it certain benefits and opportunities. Here's what joining one of these associations can do for you:
- They keep you up to date on upcoming legislation as well as changes in regulation.
- They lobby in the interests of pawnbrokers at a local and federal level.
- They can put you in contact with your peers in a non-competitive setting, offering insight into industry customs and trends.
There are state associations to consider, as well as the National Pawnbrokers Association. Shop around to determine which association is a fit for you and your interests.
10. Track Inventory and Create a Procedure for Items of Legal Consequence
Before opening your pawn shop, you'll want to have a plan for tracking items bought and sold by the business.
Always be conscious that some property brought into your shop might be stolen. Pawnshops often work with local law enforcement when items come into the shop that are of legal significance. Here, you'll need to be as open and transparent as possible. While items of this kind are an unfortunate aspect of brokering, there's nothing to be concerned about so long as you are diligent about tracking items when they're in your possession.
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 where their current location is in your inventory. Most pawnshops now use specially designed software systems to track their inventory. These electronic reporting systems are standard in the industry, and any diligent pawnbroker should have one.
11. Decide on a Location
Location will likely be the most expensive step for opening and beyond, whether paying a mortgage on the property or renting commercial real estate. This is a fixed cost that will need to come out of your business account regularly. Consider what you're budgeted for up to this point, and remember that you need to stay flexible in the event of economic downturns.
Here, you'll have to contemplate competitors in your area. Look for a location with an eight-to-ten-mile radius from other pawnshops to not oversaturate the market. Find a locale with significant space for a sales floor, a lending area, and ample space for storing inventory.
12. Hire a Sales Staff
This is where you hire a trustworthy team. Hire a third-party company to conduct background checks on your applicants. You'll want to pay close attention to criminal history and make sure your potential employees fit the industry.
It's OK to consider applicants with pawn or pawn-adjacent (jewelry store or bank) experience. However, don't discount applicants with little-to-no pawn experience. Pawnshops afford their owners a lot of flexibility as far as which software and tracking systems they want to implement. Because of this, you'll likely be training people on new procedures regardless of their experience. Above all, hire people that are coachable and that you will enjoy working with.
13. Install a Security System and Hire Guards
Have an excellent security system, but don't scare off your customers with a shop bathed in bars and cameras. Here, it would be best if you struck a balance between customer experience and protecting your inventory. You'll also want to buy tools for testing the jewelry that comes into the store to determine its authenticity.
Prepare to pay continuing expenses on security. You will need to hire security guards or pay a service to provide them. You'll also need to regularly upgrade your systems as the business grows and the industry evolves.
14. Get Your Pawnshop Insured
Insurance is essential to any pawnbroking business. It's another layer of security for your business, and you never want to be without it. Some companies specialize in insuring pawn shops. These companies offer a variety of bundles depending on the needs of your business. Check with your local pawnbroker's association to see which insurers are operating in your area.
15. Open Your Pawnshop
It's been an exhaustive journey, but now is the time to open your brand-new pawnshop. Now the real work begins, as you start providing customers lending opportunities and trading in secondhand goods. Remember always to be diligent, whether it's inventory, security, or your finances. It's a complex business, but it can also be highly lucrative with the proper management. Here's to your success!
Owning and operating a pawnshop takes a dedicated owner that closely manages their business. It never hurts to have a team of equally diligent professionals in your corner. Having a local small business lawyer on your side means getting answers to your questions as soon as you need them. Consider contacting one at any stage of your business's creation.
And when you are ready to start your business, use our simple DIY business formation process to ensure you meet all the legal requirements in your state.
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