When you have a product that you don’t use any more at home, one of the ways that you can make some money from that item is to sell it to a pawn shop. The pawn shop business model has two components: it offers short-term loans based on product collateral while also incorporating the typical retail business model of buying low and selling high.
One of the common items you’ll find at a pawn shop is an electrical guitar. Someone may have purchased a $600 guitar, but find that they are short on rent for this month. They’ll go to the pawn shop, who will offer them $150 for the musical instrument. Now there’s a decision to be made: the individual can keep the money for good or they can return the money, often with interest, to receive the guitar back after a certain amount of time.
The Pawn Shop Business Model Is Remarkably Complex
There is more than just retail sales and pawn loans that make up this business model. Many pawn store owners will also offer other services to add extra revenue streams to their bottom line. You will find a remarkable variety of additional services at individual pawn stores today. Here are just some of the ways business owners have worked to combat the tightening purses of consumers.
- Offering gold-based transactions, including the addition of rare gold coins and bullion.
- Memorabilia collectibles from various industries, from professional sports to Hollywood.
- Authentication and grading services on rare products.
The primary method of profitability in this business model, however, will always be the pawn loan. Nearly 9 out of 10 pawn store owners say that pawn loans under $150 make up the majority of their daily revenues. When financial institutions are limited credit options and payday loans are charging a 900% APR or higher for money access, people are seeking out alternatives that make sense.
The pawn store business model makes sense. Because of that, this industry is expanding at a faster pace now than in the last two decades.
Pawn Shops Aren’t Just For Those Who Are Struggling
Companies like Borro are finding that the pawn shop business model applies to more than just electric guitars, heirloom jewelry, and DVDs that have been watched a million times. Borro invites high net worth households to pawn their exclusive items for a five or six-figure loan. The concept is the same: when someone is ready to pay off the loan, then they get their item back. If they don’t pay the loan back, then Borro keeps the item.
Borro allows for a 6 month loan to be secured with low interest rates on high value collateral. Imagine being able to pawn your Picasso sketch for enough money to fund a startup. If you have a classic car, Borrow could offer you a $10k loan to fund your next venture. In its first four years of existence, Borro loaned out over $75 million in total.
Even if the business is labeled as an upscale collateral lender instead of a pawn shop, the business model is the same. People provide collateral and receive a loan. For Borro, interest rates can be as low as 2.99%, although there may be appraisal fees and other logistics costs that add 7% to the overall cost of the loan.
What Can We Learn From the Pawn Shop Business Model?
For people who have tight credit, the pawn shop business model gives them the opportunity to find the liquid capital they must have to meet their needs. With foreclosures still affecting many household credit scores, bankruptcies from the past decade dragging down credit, and tightening financial regulations, it can be difficult for someone to get a loan when they need to have some cash. This business model makes it possible to access that cash.
This business model also offers a second advantage: speed and simplicity. Although the rates may be higher than some other options that may be available at a pawn shop, a loan can often be completed within a day. That even beats the online payday loans and advances, which offer cash as soon as the next business day.
The bottom line is this: if you have a house that is full of fine art or you need to make your rent and have an electric guitar to spare, a business following the pawn shop business model will help to meet your needs.
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