Large Net Profit Margin in a Pawnshop Business

Updated: Dec 11, 2020

When looking for a business to start, one of the most important things to consider is the business' profit margin in order to give you a higher edge of success. Of course, you would want to have a higher rate of return for each dollar you spend in your business. You may also want to read my article on 'What Owning a Business Could Do To Your Life'.

My husband and I are personally interested in opening our own pawnshop business in the Philippines, where I grew up. Although we now live here in the US, we thought of opening a corporate pawnshop together with some family members. Then maybe someday we can open our system to franchising, giving us some sort of passive income from royalty fees. I am attracted to its profit margin and see a huge target population for this business back there. Many Filipinos possess jewelries made from precious metals and stones, such as gold and diamonds, and I'm thinking of primarily accepting those kind of stuff if I'll be able to launch it someday.

Going back, put simply, profit margin is the amount in cents that your business has produced in profit for every dollar you invested to manufacture a product or to deliver a service. For an instance, if you heard that Company A's profit margin during the first quarter is 25%, it means that the company earned $0.25 for every $1 it has spent to render its products or services.

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Now, why do I suggest learning about the pawnshop industry? Let's do a comparison. In one of the articles I read, it says that those in the grocery store; beverage manufacturing; lawn and garden stores; and automobile dealership businesses made a profit margin of around 2% in 2016. Meanwhile, industries in dental health; automobile rental and leasing; real estate; and accounting and tax preparation had profit margin ranging between 13 and 18% during the same period. And here's the great news for you guys thinking to start a pawnshop: a pawnshop is designed to generate a net profit margin between 15% and 25%. This is according to the standard business model of a pawnshop operation.

In the United States, there is approximately 10,000 pawnshop during 2012. This is according to the 2012 US Economic census, as released in National Pawnbroker Association's website.

How Pawnshops Do Business

So, what is a pawnshop? A pawn business helps the community by aiding those in need of short-term loan. A pawnbroker's customers are most likely those who are underbanked (people who prefer to utilize cash in their transactions rather than use financial services offered by banks such as checking accounts, savings account, or credits cards) or unbanked (people who don't use banks or similar financial institutions), people who have limited income and low credit scores who can hardly obtain bank loans, and those need of immediate personal loan such as during challenging economic times.

In the US alone, it is estimated that 1 out of 4 households are either unbanked or underbanked. This number could even be higher in developing countries, providing you more niche to conduct your business. More customers guys!

With your business' target population, you might think that the low income household doesn't sound like an awesome customer. This is not true; don't be discouraged. There are several ways you can earn money. Keep on reading to understand more why the pawnshop business is highly profitable.

Before you lend money to the borrower, a security deposit, such as precious metals (gold); gems; gadgets; television; computer; luxury watches embedded with precious stones such as diamonds; etc, is provided by the borrower to the lender. This is already an advantage for you since you have a collateral as protection. But wait, there's more. Generally, when a customer pawns a valuable, the lender only lends 40% to 50% of the projected resale value of the item. Furthermore, an interest between 5% and 25% is charged on the borrowed money. Check your local or national policies on the interest you are allowed to charge. This can vary from one region to another.

Loans are usually termed on a 30-day period. If money is not returned on the due date, another interest is placed. Pawnbrokers may decide to extend the loan as long as the customer pays the interest; otherwise, the collateral is forfeited. When extending the loan, although you can get paid more interest, also consider that the collateral can deteriorate in value. It would be frugal to understand the law of basic supply and demand, as well as certain economic indicators particularly when you deal with gold as collateral.

According to statistics, around 85% redeem their items. Consumers are usually less likely to pawn their valuable if they are unsure they cannot get it back by repaying the loaned amount.

Another way pawnbrokers make money is through retail sales of directly purchased items or forfeited items from those who defaulted with their loans. Higher value, usually 10% to 15% more, is offered to directly purchased items that in those items for lending because it is immediately available to resell.

Pawnshops can also charge fees for auxiliary services such as money transfer, bills payment, Western Union, or cellphone activation. Others also partners with courier companies such as UPS or FedEx. Including a money changer business is also a plus to drive more traffic in your store.

Establishing a pawnshop business can be lucrative. Another idea is to open your business for franchise once you have successfully established the system. You can get a percentage of your franchisees' profit from granting them a franchise of your well-established business.

If you reside in the US, the National Pawnbrokers Association (NPA) also offers valuable educational sessions and other resources if you really want to get serious in this industry.

Utilize ecommerce and the power of social media to grow your business. You can create facebook pages or even build your own website to advertise your services and reach more customers.

Good luck on your business if you decide to pursue this. To financial freedom, cheers!

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