How to start up a pawnbroking business

Operating as a pawnbroker can be complex and you'll need plenty of capital when you first start up. Read our in-depth practical guide to starting up and running your own pawnbroking business.

Research your target market

You'll need to confirm that there is enough demand for a pawnbroking business in your area. The level of demand will depend mainly on:

  • the number of people who would use a pawnbroking service
  • the number of businesses in the area that already meet this demand
  • the availability of alternatives to pawnbroking as a means of obtaining easy-access loans - for example payday lenders or credit unions

The size of the local market

Although used by people from all walks of life, pawnbroking has traditionally appealed to those who regularly need small loans to tide them over but may not have access to the full range of High Street financial services. However, the recent 'credit crunch' showed that even apparently affluent people may sometimes need help with regular commitments like school fees or utilities bills. Think about the types of customer that you intend to target and do some market research to find out how well represented they are in your area. You could use this research to help you with your advertising and marketing campaigns.

Of course, you might decide not to target a particular type of person at all - the industry is making big efforts to establish itself as a mainstream money services business that's used by everyone.

Competition - money services

There may already be other pawnbrokers in your area, so you'll need to decide whether there's room in the market for another one. Don't necessarily be put off by the competition - at least it confirms your research that there is local demand for pawnbroking services and it may well be the case that the industry is still expanding in your area. Look out for shops belonging to the three big national chains, Ramsdens, Albermarle Bond and H&T Pawnbrokers. With over 420 outlets between them they can be found all over the country. Recent years have also seen an increase in online pawnbroking firms that invite customers to send in their assets for valuation.

Bear in mind that you may face competition from other money service businesses (MSBs) who focus on the 'sub-prime' credit market. These might include:

  • 'sale and buy-back' specialists, including large multiples and franchises like Cash Converters and Cash Generator (some of these also offer a traditional pawnbroking service)
  • businesses - including some online specialists - that specialise in buying unwanted gold and other jewellery for cash
  • cheque cashing businesses and pay-day advance specialists, including large multiples like the Money Shop and various online lenders
  • doorstep lenders

In many areas, local credit unions offer low cost finance to some of the people who might otherwise use a pawnbroking service.

Check out the competition in your local area to identify how many other outlets offer broadly similar sorts of money lending and financial services as your pawnbroking business. A browse on Yell.com (categories 'Pawnbrokers' and 'Cheque cashing', perhaps also 'Credit and finance companies') and other online directories will help you to establish this. You could also look at adverts in local newspapers and print directories.

Find out as much as you can about your competitors. You could try looking at their advertisements - including their Yell.com ads and websites - and perhaps visiting their outlets. For each of your main competitors, try to establish:

  • what range of services they offer
  • do they have a minimum and/or maximum loan value policy
  • what their fees, charges and interest rates are
  • how knowledgeable and helpful their staff are
  • whether their premises are modern and smart - what sort of customer do they seem to be targeting
  • what they will accept as pledges (if they offer a pawnbroking service)
  • what their opening hours are
  • any other useful information - for example do they belong to a reputable trade association

Research current trends, plus legal and tax issues

Competition - retailing

If you plan to sell jewellery, other unredeemed pawns and perhaps a range of second-hand goods to the public then you'll face competition from other retail outlets like High Street jewellers, second-hand shops and so on. Depending on what you sell, you may also have to compete with online retailers and eBay sellers.

Researching the location of your outlet

The location of your outlet is very important. You're likely to rely on passing trade for any retail sales that you make and also for passers-by to notice the services you offer. So ideally there will be ample parking within easy reach nearby and lots of passing trade. Check that there are no plans to build new road systems which would mean that traffic (or pedestrians) would bypass your outlet, nor any proposals to impose parking restrictions nearby.

Customer profile

The types of customer your business attracts is likely to be influenced by a number of things, including:

  • the range of services you offer
  • the types of item you accept as pawns
  • the location of your business and the prosperity of the surrounding area
  • the image projected by your business and outlet

Traditionally, the majority of customers who used pawnbroking services were from the least affluent socio-economic groups. These might include unemployed people and others on low incomes. You may find that this is still the case for your business, although nowadays people from all walks of life use pawnbroking services. This change has happened for a number of reasons:

  • more and more people are now paid monthly - pawnbroking services can provide a short term loan to tide them over until pay-day
  • the industry has improved its image and is now viewed as a legitimate money service business (MSB)
  • pawnbroking is an attractive alternative to the High Street banks for people who cannot get credit or do not have a bank account
  • customers may feel more comfortable with borrowing against an item they already own
  • people have got used to realising cash from their assets on eBay
  • many people now find it harder to get credit from banks and other mainstream lenders, while some small businesses are also finding difficulty getting credit to boost their cash flow

The pawnbroking transaction

Pawnbrokers make loans to customers, secured by 'pledged' items or 'pawns'. Your income comes from the interest you charge on the loans, so you'll need to decide on what rate of interest you will charge. According to the National Pawnbrokers Association (NPA), the typical rate is around 7% per month ('simple' rather than 'compound' interest). However, this may vary depending on what your local competitors are charging and on the amount of the loan.

It's not uncommon to charge a 'document fee' for each transaction - this might be a fixed fee or linked to the size of the loan. The document fee is sometimes due when the loan is repaid, but your paperwork should make clear the distinction between the loan repayment amount and any separate fee you charge.

Think about what types of item you will accept from customers as pledges. For example, these might include:

  • jewellery and watches
  • designer handbags
  • musical instruments
  • expensive power tools
  • high value electrical items
  • fine art and antiques

You might decide to make a point of accepting unusual pledges. For example, some pawnbrokers regularly accept cars or fine, rare and vintage wines.

Jewellery and watches are the most commonly pledged items as they are valuable, easy to store and there is a strong second-hand market for them. Some pawnbrokers will only accept jewellery as pledges.

Accepting a pledge and making a loan

When you make a loan to a customer, the first step is to value the item they are pledging and then agree with them the amount of the loan you will advance against it. Loans are typically for around 60% of the secondhand value of the pledged item. The law says that you must give your customer a pre-contract information document. They must read this before agreeing to the loan. They must then sign a loan agreement that includes details of their rights and the terms and conditions of their loan. Your customer keeps part of the loan agreement as their pawn receipt. The contract period of the loan will be at least six months - but it can be longer (there is no maximum period for a loan).

Redeeming a pawn

Your customer can get their pawn back - or redeem it - by paying back the loan and the interest (and charges) due at any time during the agreed contract period. If, at the end of the agreed contract period, your customer doesn't repay their loan plus the interest due, then you must notify them in writing that their pawn will be sold. (You only have to do this if the loan was for more than £100.) Your customer then has a further 14 days to repay you and redeem their pawn.

At the end of the contract period you could offer your customer the option of renewing his or her loan for a further six months. They would first have to pay any interest that was still due on the original loan. You would draw up a new agreement.

Unfair relationships with borrowers - the legal position

The nature of your relationship with customers to whom you lend money is covered by consumer credit legislation. For example, a customer who feels that they have been unfairly treated by your business could legally challenge the credit agreement on the basis that it's unfair to them. They could also take their dispute to the Financial Ombudsman Service. You should make sure that your standard terms and practices don't create an 'unfair relationship' between you and your customer.

More information about consumer credit legislation is available on the Financial Conduct Authority website. The Financial Ombudsman Service website includes information for consumer credit businesses about their legal responsibilites to their customers. If you are at all uncertain about how to meet your legal obligations under consumer credit legislation, it's best to get advice from a qualified legal professional.

Unredeemed pawns – your rights

If your customer doesn't repay their loan then you can sell the pledged item to get back what is owed to you. This is known in the trade as 'realisation'.

The item becomes your property if:

  • the loan was for less than £75, and
  • the loan period was for six months or less

If not, then the item does not become your property. When you sell it you must give your customer the difference between the amount of the loan and what you sell the pledge for. To make sure that the item is sold at a fair price you must get the true market value for it. If it sells for less than the amount of the loan, then your customer has to make up the difference.

From your point of view, it's preferable for all pawns to be redeemed - your main area of business is lending money, not selling pledged items. According to the National Pawnbrokers Association (NPA) around 88% of pawns are redeemed, leaving 12% to be realised.

There is a high level of repeat transactions in the trade and a customer who redeems a pawn may well return at a later date to pledge it again.

Bear in mind that your terms, conditions and business practices - including enforcement and realisation procedures, must not create an 'unfair relationship' between you and your customers. Consumer credit legislation gives special rights to borrowers in cases where the relationship between the lender and the borrower is judged to be unfair. You can find out more about unfair relationships and consumer credit legislation on the Financial Ombudsman Service website.

Decide which services to offer

As well as offering a basic and traditional pawnbroking service and some retail sales - of unredeemed 'pledges' but perhaps also other goods like new jewellery - you may also decide to offer a portfolio of other services. These might include some or all of the following.

Money services

  • cheque cashing - for people who have received a cheque from an organisation like HMRC but don't have a bank or building society account, or maybe just don't want to pay it into their account. You might decide to use a cheque encashment specialist (or set up a cheque cashing agreement with a bank) so that you can offer this service
  • pay-day advances (also known as 'salary advances' and 'cash til pay-day' loans). Bear in mind that the government has tightened up the regulations relating to pay day lending and has introduced an interest rate cap
  • money transfers, for example as a sub-agent for Western Union
  • pre-paid credit cards
  • secured and unsecured personal loans
  • foreign currency exchange services
  • 'sale and buy-back' transactions, a sort of half-way house between pawnbroking and second-hand goods retailing

Other services

  • purchases of customers' gold jewellery by weight for cash, to take advantage of times when gold scrap prices are high
  • jewellery cleaning, engraving and repairs
  • valuations
  • specialist jewellery insurance services

Your market research will have identified the services that other money service businesses (MSBs) in your area offer. You may find that you can offer a service that isn't available locally. Possibly you could offer a broader range of services to attract potential customers to your outlet. Bear in mind that if a customer comes into your outlet to pawn an item they may return at a later date to use the other services you offer.

The right image

It is really important that your business projects the right image to would-be customers. In the past, pawnbroking suffered from a negative image, but the industry and the National Pawnbrokers Association (NPA) have worked together in recent years to improve this. It's important that your business is professionally run and that staff are well turned out, helpful and polite. Make sure you provide a debt advice leaflet to any customers who may need guidance on managing debt.

Many independent pawnbroking outlets look and feel rather old fashioned with cluttered interiors, poor lighting and uninspiring window displays. Try to make sure that your window display is attractively arranged and that the interior of your shop is well lit and welcoming. Some modern pawnbrokers and MSBs look and feel more like a bank or a financial services office than a jeweller's shop - this might be the route you decide to take for your business.

Best practice

Complying with industry best practice guidelines will help you to promote the right image for your pawnbroking business. You have a common law duty to take 'reasonable care' of all property you take into pawn. You are not obliged by law to take out insurance cover for the pawned items you hold, but you might consider operating a compensation scheme in case an item is lost or damaged. This would help to preserve customer goodwill. If you do decide to insure pawned items, the cost can be met by a small increase in the rate of interest you charge on a loan. The NPA in conjunction with insurance brokers TH March offers a Customer Compensation Plan to members - this is an insurance-backed compensation scheme designed to promote customer goodwill.

It is, of course, essential that you do not take in any stolen goods - even if you do so unknowingly. Checking customers' identity, monitoring transactions carefully and keeping very good records will help you to prevent this from ever occurring. It will also help to prove that you acted in good faith if you were ever duped into accepting a stolen item. You might consider joining the Safe Seller Scheme - this lets you check items brought in by customers against an online database to see if they have been reported as lost or stolen. You can find out more about the scheme on the CheckMEND website.

Advertising your business

However you decide to operate, you'll want to make sure that your potential customers know about your business and the range of services it offers.

There are a number of things you can do to promote your business:

  • advertise in your local newspaper and local directories
  • launch your own website showing the services you offer. You could include online tools so that potential customers can check how much they could borrow against their goods, or how much they could sell their gold for
  • have some leaflets printed that you deliver in the locality or send out as a mail-shot
  • make sure that the front of your outlet clearly indicates to passers-by exactly what types of service you offer
  • use social media like Facebook and Twitter to let people know how pawnbroking works

Joining the NPA is a good way of promoting your business. Members are listed in a searchable online directory and can use the NPA logo on their premises and stationery. This will help you to promote a professional image. You can contact the NPA and find out more about their services to members on their website.

Buy an existing business

You may decide to buy an existing pawnbroking business rather than start your own venture from scratch. Buying a going concern can mean that the customers, staff and premises are already in place.

  • there are established customers and an established 'pawnbook'

But buying a business can be a hazardous, expensive process unless you have the right skills and experience on your team, including legal and financial know-how. Establish the genuine trading and financial position, so that the price you pay for the business is not too high.

Other matters to consider include:

  • the condition and value of any retail stock you are buying. Check this over carefully before agreeing a price. Take steps to confirm rights of ownership and be aware that currently pledged items do not belong to the business. Make sure these can be easily identified.

Franchises

Franchising can be a good halfway house between starting out from scratch and buying an existing business. If you purchase a franchise you'll still be setting up your own business, but you'll be able to benefit from the experience, resources and perhaps the name of a business that is already successful.

Although different franchise schemes vary in detail, most feature the following key points:

  • as a franchise holder, you will remain self-employed but will use the identity (corporate colours, logos, trade name and so on) of the franchisor
  • in return, you will pay the franchisor a fee
  • both you and your franchisor will have to fulfil certain obligations and maintain certain minimum standards

Details of the above points are set out in the franchise agreement or contract, which both you and your franchisor will sign. The agreement will also deal with other matters, for example any territorial exclusivity due to you and the minimum period for which the franchise will run.

Before entering into a franchise agreement, it is advisable to check the terms carefully to be sure that you are getting a reasonable deal. Go through the contract with your solicitor before signing anything. More information about franchising is available on the Franchise Info website. Information is also available from the British Franchise Association (BFA).

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