If you’re a business owner looking for a new investment, you might consider opening a pawnshop. With the economic downturn spurred by the COVID-19 pandemic, you could potentially help many customers while building your own portfolio.
However, with any new endeavor, your success depends on careful research. Here are seven things you should know before opening a pawn shop so that you do the maximum good for all.
1. Choose a Location
In the real estate world, the phrase “location, location, location” reigns supreme, but it matters to the future of your business as well. The rental price of your storefront isn’t the only factor that matters. If you hope to attract a higher-end clientele, opting for a cheap lease in a shady area may drive your target customers away.
Conversely, if you choose the most affluent part of town, you might dissuade folks who only need speedy cash. They might assume you aren’t interested in their wares. Aim for somewhere in the middle.
2. Build Your Inventory
To attract buyers and potential vendors alike, you need to have an inventory so that they understand the types of merchandise you offer. The most frequently requested items include gems and precious metals, wristwatches, designer handbags, firearms and electronics.
One way to build your inventory is to suggest a higher payout for outright purchases. Some owners offer approximately 10% to 15% more to individuals to forego the redemption period and sell their goods outright. Be selective if you choose this option — does the merchandise you pay more to obtain fit your business model?
3. Determine Interest Rates
Pawnshops charge higher interest rates than banks because they assume more risk. Many individuals who walk through the door can’t qualify for traditional lending. Furthermore, as an owner, you need to insure and store the goods, which adds to your overhead costs.
However, if you earn a reputation for usury, you’ll struggle to attract repeat business. Do market research to find out what other shops in your area charge, and keep your rates competitive.
4. Take Care of the Legal Details
Did you know that if you run your pawnshop as a sole proprietorship or single-member LLC, you could pay more in taxes? However, you can take a 2553 election to be taxed as a corporation and potentially slash your rates. Talk to your accountant about your options — while you have deadlines for filing, you might qualify for a late exemption.
Does your legal business name differ from the one hanging on your shop? Many states require doing business as (DBA) licenses or declarations. Failure to follow the rules could result in pricey lawsuits and fines. The steps vary from state to state, so consult with your local small business association (SBA) for help.
5. Consider Your Extension and Grace Period Policy
Pawnshops typically offer 30-day loans, and the balance comes due at month’s end. If a customer’s loan ends on the 30th, but they get paid on the first, will you give them a day or two break? Many shops offer seven-day grace periods — only you can make the ultimate business decision.
Similarly, if your customer needs another month to repay their debt, will you offer an extension? It could potentially add more interest money to your pocket, but you bear the increased risk of default.
6. Fine-Tune Your Appraisal Guidelines
If you want to earn a reputation for giving fair value for items, you have to learn how to appraise jewelry and other things. Do you know how to evaluate a diamond for a yellow tint or identify gold by carat? You need to take a course if you don’t.
Furthermore, the best pawnbrokers consider sentimental value when offering to buy. You can’t put a price tag on an engagement ring that was someone’s last link to their deceased husband, but you must find a way to do so compassionately if you want to earn a stellar reputation.
7. Market Your Services for Today’s World
You also need a marketing strategy. With the new restrictions due to COVID-19, you might need to consider factors like whether to require masks if you live in a jurisdiction that doesn’t require them by law. You also need to consider safety measures like social distancing — will you limit the number of visitors at a time, for example? How will this affect your marketing?
While many pawnshops depend on word-of-mouth, you may need to develop a more dominant virtual presence. Prospective clientele may prefer to shop online — a well-designed website can make or break your profitability.
Know These 7 Things Before Opening Your Pawn Shop
Running a pawnshop can be a profitable endeavor during challenging economic times. Once you know the seven tips above, you can set yourself up for success.
About the Author:
Oscar Collins is the managing editor at Modded. He writes about cars, fitness, the outdoors and more. Follow @TModded on Twitter for more articles from the Modded team.