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Ten Tips For Writing a Pawn Shop Business Plan

Jul 29, 2008
Pawnbroking is a noble profession dating back thousands of years, yet because of its nature is often misunderstood by entrepreneurs who wish to enter the industry. Here are 10 tips you should consider when writing a pawnshop business plan.

Think Outside of the Industry

While the pawnbroking industry has been around for over 3000 years there are many things that they still do not do correctly. While you have the advantage of plugging in estimated percentages and margins in your business plan based on Annual Reports and SEC filings of the public companies in pawnbroking, this does not mean that you should model your operation after them.

I have found that your best bet is to visualize your typical customer standing in front of you, the customer you wish to attract, and then create a unique, fun, and interesting experience for this customer. Think Neiman Marcus(R), not Wal-Mart(R).

Do not however make the grave error of totally outclassing your customer base. You do not want to put a high-class pawnshop in a low class neighborhood or vice versa. Again, just keep in mind the customers you wish to attract, hopefully within your radius, and make sure their experience when dealing with your company is not boring.

Look for the Eight Mile Radius

If you have yet to find a location for your pawnshop, one of the most important things to consider is the type of customers that you wish to attract and the size of loans that you wish to write. As a rule of thumb, over 80% of a pawn shops loan base will come from within an 8 mile radius of the location.

This of course varies depending on market place, with the circle growing wider in rural locations with lower population density, and the circle growing narrower in urban areas with high population density and increased competition. Keep this 8 mile 80% rule in mind in choosing a location that will have the ability to attract customers that you desire.

If you have already chosen a location, draw a circle on a map representing this 8-80 rule, and concentrate the majority of your marketing on those who live within the radius of your circle. Catering to the types of residents that live within the circle will show you the most bang for your buck in your marketing efforts.

Secure a Credit Line Double Your Anticipation

The boilerplate joke for opening a new pawnshop location is the question: "Well, what are you going to run out of first; storage space, or cash?" This is because while you have inventory for sale in the form of purchased goods, trade-ins, and defaulted loans, operating a pawnshop in a successful mindset will reveal that your true inventory item is nothing more than cash.

When you are in the business of renting money, the last thing you want to do is run out of it. An aggressive lending practice in any pawnshop is an important key to the success of the location and is difficult to do on a limited budget. Therefore, in your business plan it is important to spell out your estimated default rate on your loan base (usually around 25%) and your estimated effective yield on your income producing loans.

This makes it much easier to sell the idea to your banker on borrowing cash from him at 10% per year and loaning it out to your customers at a return of 10% per month.

Plan on a Variety Store with a Bank Inside

Some of the most successful pawnshop operations that I have witnessed recently have had the front room laid out like your typical variety store with a homey and unique feel to it. Then, somewhere in the layout of the front room is the loan area which looks like your usual small bank branch in a grocery store.

Keeping traffic patterns and security in mind, this will give your pawnshop a warmer and friendlier feel than a big-box store, yet a much more secure feel than your typical garage sale looking pawnshop. It is important to choose colors, displays, flooring, lighting, signage, and finishes based on what will make your desired customer comfortable.

It is wise to have the classiest part of your front room be your retail jewelry area, followed by a private closing room which will allow you to successfully negotiate loans with higher end customers, if this type of customer is what you desire and market to. Just think clean and comfortable for your customers and you will do just fine.

Prepare for Wild Swings in Cash Flow

All pawn shops, especially new startups, experience periods of negative cash flow. January July and August are usually the most prevalent. November December and February usually see the most positive cash flow periods. You will also experience more dramatic ups and downs in your loan balance during these months.

Other occurrences, usually less predictable, will also have dramatic effects on your cash flow. Some of these occurrences may include; local economic conditions, large layoffs or factory closings in your area, seasonal work in your market area, exceptionally cold winters or hot summers, and even the current price of a gallon of gasoline.

You should prepare for this in laying out your business plan, and you should also propose additional revenue streams to get through these negative cash flow times with supplementary desired goods and services offered to your typical customer.

Look to Hire Those with Non-pawn Experience

At risk of sounding harsh, hiring employees with previous pawnshop experience usually means that you're hiring a person who has been trained improperly and is typically not open to accepting and properly implementing the systems and processes in place in your pawnshop.

Previous retail experience is usually a plus as is previous military experience. Former jewelry store employees along with former rent-to-own store employees also seem to be a good fit. People with backgrounds in banking and finance will also work to your advantage. The opportunity to hire a graduate gemologist is almost always a plus and may give you the opportunity for an additional revenue stream.

I have also found that hiring retired police officers provides valuable previous experience for a new pawnshop employee. Make sure to include in your business plan a procedure for background checks, credit checks, and drug tests for new hires.

Design for Maximum Security but not Prison-like

Store security is of utmost importance to your pawnshop operation and should be included in your business plan. This is no place to cut corners and proper security measures will provide confidence to your loan customers that their pledged items are being stored securely.

If possible, it is wise to avoid cages, screens, bars, and bulletproof glass. This will of course need to be determined depending on your exact location. At all cost, avoid employees visibly carrying weapons. If you feel that it is necessary in your location, you have chosen the wrong location.

You should plan on a minimum of TL-TR30 safes for jewelry and cash storage, which should also help you with your insurance rates. Full store parameter and interior state-of-the-art alarm systems are necessary and should be planned for. So is a full store state-of-the-art DVR surveillance system. Opening a pawnshop without these minimum security measures is foolish.

Set up Expert Systems for Every Procedure

Taking the time to set up expert systems for a pawnshop operation is not only necessary but will ensure your success. There are several excellent computer software systems designed exclusively for the pawnbroking industry, and you should consider computerization mandatory no matter what size your operation is. It would be wise to choose your preferred software and mention it in your business plan.

Additional systems should be set up for every procedure that takes place in your pawnshop. Loan procedures, sales procedures, management, hiring and firing, and even procedures on how to properly answer the telephone. Again, this is of major importance even if you have no employees yet.

You will find it much easier to lay out the systems if you begin with the end in mind. Try to consider your pawn shop running without you being there, or without you being in the picture at all. How do you want things done? How do you want your customers treated?

Prepare Storage with Cubic Feet in Mind

A back room storage system for pledged merchandise is something that is usually overlooked in a pawnshop business plan. If you are limited in the amount of pledged goods that you can store, you are also limited on what you and your employees can accomplish building your loan base.

Jewelry storage is usually the easiest to accommodate and the majority of jewelry pledges can usually be filed in the safe using a No. 1 coin envelope. Warehouse shelving generally works best on an alphanumeric system and shelf space should vary to hold different sized items without wasting space. If possible, I recommend floor to ceiling shelving in the warehouse while keeping safety in mind.

Smaller items pledged together can easily be stored in Ziploc bags, and your computer system should be able to accommodate you for tags or labels on all pledged merchandise. When it comes to storage, think fast, safe, simple, and accurate, but also try to utilize every cubic foot you have.

Seek Outside Education on Specialties

While determining the fair market value on the majority of pledged items is a simple task nowadays by using the Internet, it would be wise to include in your business plan that you also have the education, contacts, or reference materials to value a wide variety of specialty items.

The more versatile you can be in valuing the items offered as a pledge; the more creative you can be in building your loan base. It is also important to seek out proper education to be able to authenticate expensive items such as high-end watches, vintage jewelry, designer brand goods, antiques, and other luxury items that are frequently knocked off.

Most pawn brokers frequently lose out on amazing amounts of additional revenue because they lack the ability to be able to separate the faked or copied from the real thing. Do not fear this important revenue stream for your pawnshop, receiving appropriate training will pay you handsomely.
About the Author
Stephen Krupnik, a pawnbroker for over 30 years, teaches, coaches, and consults for the pawnshop industry. Contact Steve Krupnik at support@pawnshopadvisor.com or for more information and FREE tips on the pawnbroking industry, please visit http://www.PawnShopAdvisor.com/
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