How to Start a Pawn Shop

Starting a pawn shop can be a lucrative and rewarding venture, offering customers collateral loans while also engaging in the buying, selling, and trading of valuable items.

Having said that, you should keep in mind that launching a successful pawn shop requires careful planning, significant investment, and a wide range of skills.

In this comprehensive guide, we’ll walk you through all of the essential steps you’ll need to take to start your own pawn shop, from conducting market research and securing funding to complying with all regulatory requirements, setting up your operations, and attracting a loyal customer base.

Ready to turn your business idea into a reality? Tailor Brands is our top recommendation because it guides you through every step of the formation process with hands-on support — from paperwork and compliance to devising a detailed plan to help you achieve your business goals.

Tailor Brands ($0 + State Fees)

Industry Overview

The pawn industry has experienced slow but steady growth over the past few years, with a compound annual growth rate (CAGR) of 1.2% between 2018 and 2023.

This sector comprises approximately 11,000 pawn shops, generating an estimated $15 billion in annual revenue — the majority of these businesses are independently owned, with only a small portion operated by larger chains.

Looking ahead, the industry is projected to grow at a slightly faster rate of 1.5% CAGR from 2023 to 2028, primarily driven by the growing digital presence of pawn shops.

With over 60% of pawn shops now online and 30% directly offering e-commerce services, this shift is creating new revenue streams and expanding access to both short-term lending and second-hand goods, boosting overall industry growth.

Startup Costs

If you’re considering whether a pawn shop business is right for you, the first thing you’ll need to know is whether it’s a) affordable, and b) worth the investment. I mean, how much can you actually make running your own pawn shop?

Well, it depends. The initial investment for a pawn shop varies widely based on factors such as your location, the size of your store, and how much capital you’ll need for loans:

• Storefront Leasing or Purchase ($36,000 — $500,000+): You will need to either buy or lease a commercial space to operate your pawn shop, with costs ranging depending on your location, the property size you’re after, and the local real estate market conditions.
• Inventory Purchase ($10,000 — $50,000+): While you don’t need to fill your shop with inventory immediately, you will need to spend some money to ensure your showroom isn’t empty by stocking items like jewelry, electronics, and other valuable goods to attract customers.
• Licensing and Permits ($5,000+): Depending on the state in which you plan to operate, you will need to obtain a variety of licenses to comply with the regulations governing pawn shops. Some of the key licenses include a pawnbroker’s license, a precious metals dealer license, a second-hand dealer license, and a general business license. In addition to these, local or municipal permits may be necessary depending on the specific requirements of your city or county.
• Security Systems ($20,000 — $100,000+): Given the nature of the pawn shop business, you will likely need to invest in a comprehensive security system to protect both your inventory and customers’ pledged items. This will involve installing high-quality safes, surveillance cameras, alarm systems, and, depending on your location, even professional 24-hour security services.
• Loan Capital ($50,000 to $200,000+): To start a solid operation, you will need to dedicate at least $50,000 to be used as loan capital, meaning used to offer short-term loans to your customers. The exact amount required will depend on the size of your operation and how aggressively you plan to expand, as your available capital is directly tied to the number of loans you can provide.
• Employee Expenses ($100,000 to $500,000+): You will need to hire employees to handle customer service, inventory management, and loan processing. This will need to include at least a couple of staff members with expertise in appraising and gemology to accurately assess valuable items like jewelry.

Note: Given that approximately 50% of the items pawned are jewelry, it is vital to employ staff who have expertise in evaluating and authenticating valuable stones. This means hiring individuals such as certified gemologists or experienced jewelry appraisers who can accurately distinguish between solid gold and gold-plated items, identify genuine diamonds versus imitations, and assess the quality of various electronics and other high-value merchandise.

Earning Potential

Now, you may be thinking that running a pawn shop is all about buying, selling, and trading second-hand goods. However, that’s not true – if your primary interest lies in those activities, you should consider starting a second-hand store instead.

In fact, you may be surprised to learn that the core business of a pawn shop (80% of revenue) revolves around providing short-term loans to customers using personal property as collateral.

Simply put, by entering the pawn business, you are really entering the short-term lending business, not the second-hand retail business as you might initially think.

A good way to understand this is that you make money by borrowing funds cheaply — say, at an annual interest rate of about 10% — and lending them to customers at significantly higher rates, typically between 8% and 12% monthly.

This means that for every $100,000 you lend, you could potentially earn $86,000 in profit after covering your borrowing costs.

You have probably noticed that the items pledged as collateral are not part of the revenue-generating process; they exist solely to protect against defaults, which happen in about 25% of cases when customers fail to repay their loans.

To put it simply, the collateral items serve to minimize your losses; they do not contribute to your profits.

8 Steps to Starting a Pawn Shop

In order to start a pawn shop business, you’ll need to complete the following steps:

1. Planning Your Pawn Shop
2. Registering Your Business
3. Secure Funding (If Applicable)
4. Finding and Securing the Right Location
5. Develop a Storage System
6. Setting up Business Accounting
7. Getting all Applicable Licenses and Permits
8. Obtaining Business Insurance

We’ve broken each one of these down in more detail below.

Still exploring your options? Check out other small business ideas.

Step 1: Plan Your pawn shop

Before diving into your pawn shop, you’ll need to spend some time conducting thorough market research.

One thing we strongly recommend, especially for first-time entrepreneurs, is visiting several pawn shops both in your area and in other locations.

This will allow you to analyze the competition, learn from their successful strategies, and identify gaps where your pawn shop can stand out.

You should analyze what’s working, the types of customers they attract, and which services are most popular.

In addition to understanding your competition, you should also familiarize yourself with the local regulations and licensing requirements.

Pawn shops are heavily regulated at the federal, state, and local levels, so it’s essential to understand the specific licenses and permits required in your area before proceeding any further.

This will help you evaluate the financial viability of your project — including projected revenues and expenses — as well as determine the best location for your pawn shop.

Finding a Suitable Name

Choosing the right business name is both important and challenging.

This is because your name will need to be eye-catching, memorable, and (at least somewhat) related to your industry.

If you don’t already have a name in mind and need help, you can visit our How to Name a Business guide.

If you do have a name in mind, we recommend researching the following:

• Your state’s business records
• Federal and state trademark records
• Social media platforms

You will also need to make sure that your business’s name is available as a domain — this is your website’s URL address.

Note: If you’re planning to operate a sole proprietorship, you might want to operate under a business name other than your own name — known as a “Doing Business As” (DBA) name. Keep in mind that this is not recommended for a pawn shop.

Coordinating with Law Enforcement

Before proceeding any further, you should meet with your local law enforcement to understand any specific reporting requirements that you, as a pawnbroker, will need to follow.

This is because — unlike other businesses — pawn shops are typically required to submit daily transaction records, enabling law enforcement to monitor activity and prevent the sale of stolen goods.

Even beyond reporting, pawn shops face strict regulations around hiring. You may be restricted from hiring individuals with certain criminal records or substance abuse issues, and you will likely be required to conduct background checks, credit checks, and drug tests on potential employees.

Because the specific requirements can vary and each jurisdiction has its own regulations, you should, at this phase, schedule at least an introductory meeting with local law enforcement to clarify all the aforementioned obligations.

Note: In most police departments, there is a dedicated officer who handles pawn shop reporting, and establishing this connection early on can help streamline your operations and avoid complications down the line.

Creating a Detailed Business Plan

A detailed business plan is essential for outlining your business strategy and securing funding.

When drafting one, be sure to include an executive summary, market analysis, organizational structure, product line, marketing strategy, and financial projections.

Make sure to include details such as the type of loans you’ll offer, how you’ll handle defaults, and the collateral types you’ll accept.

This plan will not only serve as a roadmap for launching your business but will also be a valuable tool if you seek financing from investors or lenders.

For more information on this step, you can have a look at our How to Write a Business Plan guide.

Step 2: Register Your Business

One crucial aspect that cannot be overlooked when starting your pawn shop is the importance of establishing a solid business foundation. While sole proprietorships and partnerships are the most common entity types for small businesses, they’re a far less stable and advantageous option than LLCs.

This is because unincorporated business structures (i.e., sole proprietorships and partnerships) expose you as an owner to personal liability for your business’s debts and legal actions, while LLCs protect you by keeping your personal assets separate from your business’s liabilities.

In practice, this means that if your pawn shop were to face a lawsuit or incur any debts, your savings, home, and other personal assets could not be used to cover these costs. On top of this, forming your business as an LLC also helps it to appear more legitimate and trustworthy.

Note: If you’re interested in more information before getting started, we recommend having a look at our state-specific How to Start an LLC guide (DIY) or our in-depth Best LLC Services review (for those opting for a professional service).

Step 3: Secure Funding (If Applicable)

Securing funding is a critical step in starting your pawn shop. Financing options include bank loans, Small Business Administration (SBA) loans, private investors, and crowdfunding.

Each option has its pros and cons, and the best choice will ultimately depend on your financial situation and business plan.

It is generally recommended to calculate your first-year income projections based on the initial capital you allocate for loans, add 12 months of operating expenses, and then double that total.

The number you come up with, should be used as a rough estimate of the amount of funding or credit you should aim for to ensure a solid foundation for your pawn shop.

Of course, the extent that this step will be applicable to you will depend on your individual financial situation.

Step 4: Find and Secure the Right Location

The next step you’ll want to take is to find (and secure) the right location for your pawn shop.

While many factors come into play when deciding on the ideal spot, it’s important to remember that customers primarily come to pawn shops out of necessity, not choice.

On average, around 80% of a pawn shop’s loan base comes from customers who live within an 8-mile radius of the shop.

This means that even though marketing and branding are important, your location plays a more significant role in attracting customers than any other aspect of your pawn shop’s operations.

So when thinking about a location, consider the demographics of the area — who lives there, what income brackets they fall into, and the local demand for pawn services. This data will help you choose the right location, as the surrounding community will provide the majority of your business.

Note: You will also need to make sure that your prospective property is zoned for commercial use and complies with all applicable local and state regulations (discussed in more detail in Step 7).

Step 5: Develop a Storage System

A critical aspect that is often overlooked when starting a pawn shop is how much space you’ll actually need to store pledged items.

Think about it — in addition to the items you own for resale, you’ll need to securely store customer collateral.

This means having separate, secure spaces for different types of items: high-value goods like jewelry will need special safes, while larger items, such as electronics or tools, require dedicated storage.

You’ll also need distinct areas for items that have defaulted and are ready for sale, as well as different storage systems for items being evaluated or held temporarily.

To deal with all this, we recommend using a digital inventory management system — this will help you track all pledged items efficiently and minimize potential errors.

Step 6: Set up Business Accounting

Recording your various expenses and sources of income is critical to understanding the financial performance of your business.

You can categorize specific accounts related to pawn shop operations into various categories, such as:

• Loan Operations
  • Interest income from pawn loans
  • Principal amounts of outstanding loans
  • Forfeited collateral value (e.g., items not redeemed by customers)
• Retail Sales
  • Revenue from selling forfeited items (e.g., items not picked up)
  • Revenue from purchased items for resale (e.g., electronics, jewelry)
  • Cost of goods sold (e.g., cost of acquiring resale inventory)
• Operational Expenses
  • Staff salaries and benefits (e.g., wages, insurance)
  • Rent or mortgage for the shop (e.g., monthly lease or property costs)
  • Utilities and maintenance costs (e.g., electricity, repairs)
  • Security system expenses and monitoring fees (e.g., alarm systems, cameras)
• Inventory Management
  • Purchases of items for resale (e.g., bulk purchases, individual buys)
  • Valuation adjustments for collateral and inventory (e.g., recalculating value of items)

This should provide clear visibility into your business’s financial performance and aid in accurate cost analysis.

Step 7: Secure All Required Licenses And Permits

The applicable licenses and permits that you’ll need will largely depend on your state and local regulations.

Even so, we’ve compiled a list of some of the common licensing regulations that you’ll likely need to satisfy in order to operate legitimately.

• Pawnbroker’s License: You will need to obtain this license from your state’s Department of Commerce or Financial Institutions to legally be allowed to issue pawn loans.
• Second-Hand Dealer License: You will need to obtain a Second-Hand Dealer License from your local city or county licensing department to be allowed to buy and sell used goods.
• Precious Metals Dealer License: You will need this license from your state’s Department of Revenue or a similar agency if you plan to deal in gold, silver, and other valuable metals.
• Small Loan License or Consumer Credit License: You will need to apply for this license through your state’s Financial Regulatory Authority or Department of Financial Institutions to legally be allowed to issue short-term loans.
• Firearm Dealer License: If you plan to deal in firearms, you will need to obtain a Firearm Dealer License from the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF).
• Business Operation License: You may be required to obtain this license at the state or local level to legally operate your pawn shop. You’ll typically need to submit an application, pay fees, and meet certain criteria specific to your location).
• Sales Tax Permit: You will need to apply for this permit from your state’s Department of Revenue to legally collect sales tax on retail items.
• Zoning and Land Use Permits: You’ll need to contact your local planning or zoning department to verify if your location’s zoning regulations allow for commercial use and, specifically, for operating a pawn shop. You may also need to apply for a special use permit or variance depending on local restrictions.

Besides these licenses, you will also need to comply with a range of federal, state, and local regulations — there are 14 at the federal level alone, with the main ones listed below:

• Registration with FinCEN (Financial Crimes Enforcement Network): You will need to register with FinCEN to comply with anti-money laundering laws. This helps ensure that your pawn shop is reporting any suspicious financial transactions and adhering to the Bank Secrecy Act.
• US Patriot Act Compliance: Under the Patriot Act, pawn shops are required to implement measures that help prevent money laundering and terrorist financing. This includes verifying the identity of customers and reporting any suspicious activities.
• Truth in Lending Act (TILA): You must comply with the Truth in Lending Act to ensure loan transparency. This means providing clear and detailed information to your customers about loan terms, interest rates, fees, and repayment schedules.

Note: Keep in mind that some states require pawnshops to post a surety bond, with amounts varying by jurisdiction, to ensure compliance with regulations and protect customers from potential misconduct.

Step 8: Secure Business Insurance

In addition to securing the necessary permits and licenses, you will also need to obtain business insurance to protect your business’s assets from potential financial losses — this will probably be a legal requirement depending on your state.

Note

Even if you form an LLC, purchasing business insurance is still a good idea. This is because an LLC structure protects your personal assets, not your business’s.

Having said that, you may be surprised to find out that most standard insurance underwriters refuse to cover pawn shops due to the unique risks involved.

Instead, only a few insurance companies specialize in writing policies specifically for the pawnshop industry, and these specialized policies often come with significantly higher costs.

The exact cost of insurance can vary significantly from pawn shop to pawn shop, depending on factors such as the types of items being insured, the value of the loans being covered, and other specific risks associated with the business.

Due to this variability, it’s difficult to provide a standardized range for insurance costs; however, you should expect to pay multiple times what a typical business would for coverage.

What many pawn shop owners end up doing to lower their insurance costs is assume more risk in the event of a loss, meaning that they choose either higher deductibles or a lower limit on their coverage.

Ready to Get Started?

How to Start a Pawn Shop FAQs

How profitable is a pawn shop?

Pawn shops can be quite profitable, with the potential to earn up to $86,000 in profit for every $100,000 lent.

This profit doesn’t even include extra income from selling forfeited items and other retail goods. However, actual profitability can differ significantly based on your location, customer base, and how well you manage your operations.

How do pawn shops make most of their money?

Pawn shops generate around 80% of their revenue from interest on short-term loans.

This income is supplemented by profits from selling forfeited items that customers fail to reclaim and from directly purchasing goods for resale, such as jewelry and electronics.

What are the rules of a pawn shop?

Pawn shops are heavily regulated at the federal, state, and local levels, requiring various licenses and permits to operate legally.

They must keep detailed records of all transactions, report daily to law enforcement agencies, and follow strict guidelines regarding interest rates, loan terms, and the handling of pledged items.

Is it cheaper to pawn or sell?

Generally, pawning an item is cheaper if you intend to reclaim it later, as you will only pay interest on the loan.

On the other hand, selling an item provides immediate cash but means giving up ownership entirely.

The choice will depend on your financial needs and whether you want to retain your item.