Pawn shops might be known for their stock of DVDs and electric guitars, but short-term loans make up a bulk of the revenues that this type of business earns on a daily basis. Some people don’t have the credit to get a traditional loan and others don’t even want to bother trying. By providing collateral, a loan is issued with higher than average interest rates.
To start this business opportunity, you’re going to need to have a pawn shop license. This is typically issued through the Department of Revenue, Department of Labor and Industries, or other similar institution within your jurisdiction. The pawn license application often requires a personal affidavit and an employment history. Credit and background checks are often mandatory and you may be required proof of your net worth.
Many jurisdictions are now requiring applicants for a pawn shop license to be fingerprinted during the first stages of the application process. After you’ve shipped off your application, here are some of the other steps you’ll want to follow so you’ll have the most profitable experience possible.
1. Learn how to assess the value of goods.
There is a large difference between the price that someone believes an item is worth and how much it is actually worth. Someone might have paid $600 for a sweater, but its actual retail value from a pawn perspective might be $50. On the other hand, you also don’t want to be the Goodwill store who sold a $35,000 watch for $6. Research auction websites, thrift stores, and even stop by a local pawn shop to see what their pricing happens to be.
If you don’t have any experience in the assessment of values, then an internship or employment position at a pawn shop may be beneficial. That way when a customer tries to sell something that may not be as authentic as they are claiming, you can spot it and stop the transaction.
2. Secure your capital.
If you’re going to be loaning out money to others, then you’re going to need some capital on hand for that purpose. Many pawn shops are required to have a minimum amount of liquid assets available at all times. Some jurisdictions may require that amount to be as high as $1 million. Your pawn license application will be denied if you do not have consistent access to the capital that is required.
To secure your capital, you’ll likely need a business plan. Examine what your expected costs are going to be, set a budget that you don’t break, and project your annual incomes based on your knowledge of the local market.
3. You may need Federal licenses.
Many pawn shops buy, sell, and trade firearms as part of their business model. To do this, a Federal firearms license will be required. You will also need to have paperwork on hand to perform background checks on all buyers of firearms to legally sell them. Sales tax is a license that is often required, plus a general business license is usually necessary, and you may need to have an EIN established for tax purposes.
4. Zoning matters when it comes to a pawn shop.
Just because a zone is listed as commercial doesn’t mean that you can locate a pawn shop there. You’ll need to make sure all location requirements with your community are met for the location, so get those requirements from the city council, county clerk, or other office so you can secure a lease or building that is appropriately zoned. There may be spacial requirements that keep you away from schools, parks, and specific types of businesses.
5. You’ll need contracts for the loans that you lend.
Lending out money without a contract associated with it doesn’t make a lot of sense. Verbal contracts are difficult to enforce if they are broken. You’ll want to speak with a local attorney about drafting a contract for all of the different types of loan products you plan to offer people. You’ll also need to cover how to act should items become damaged or loss while under your care or if the collateral is under the care of the customer.
6. Secure your shop.
Pawn shops attract the criminal element at times, so having a good security system is essential. Make sure that your security system is tied to an armed response so that you can avoid danger if it comes your way.
None of these steps matter if you don’t know how to get a pawn license. Check local regulations, fulfill the requirements for the application, and you’ll be able to open your new business sooner rather than later.
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