Starting A Pawnbrokers

Pawnbroking has been around for centuries, and it is still a popular way to borrow money in the UK.

The process is simple: customers bring in items of value (e.g., jewelry, electronics, musical instruments) and receive a loan based on the item’s worth.

The loan can be repaid with interest, or the customer can forfeit the item and let the pawnbroker keep it. Pawnbrokers must be licensed by the government, and they are regulated by a set of laws known as the Pawnbrokers Act.

These laws protect consumers from unfair practices, such as exorbitant interest rates or unreasonable seizure of collateral. If you’re considering taking out a pawnbroking loan, it’s important to do your research and choose a reputable lender.

With a little bit of careful planning, pawnbroking can be a safe and convenient way to get the cash you need.

When you first start out, you will need plenty of capital to operate as a pawnbroker. Learn how you can start and run your own pawnbroking business with our useful guide below.

How to open a pawn shop in the UK

Opening a pawn shop in the UK can be an intriguing entrepreneurial venture. With its rich history and diverse economy, the UK offers a promising market for a pawn shop. This business model revolves around providing short-term collateralized loans to individuals in need, while also offering a platform for selling and purchasing second-hand goods.

By carefully selecting a suitable location and understanding the local market demand, a pawn shop owner can tap into a wide range of potential customers seeking quick financial solutions or unique items at affordable prices.

Establishing a pawn shop in the UK requires compliance with relevant regulations, such as licensing and reporting requirements, to ensure legal and ethical operations. With the right strategies in place, a pawn shop can thrive by fulfilling a valuable niche in the British retail landscape.

Here is the step by step guide to opening a pawn business in the UK:

Research your target market

There should be enough demand in your area for a pawnbroking business. Demand will be determined mainly by:

• The number of people who would use pawnbrokers
• Businesses that already meet this demand in the area
• The amount of alternatives to pawnbroking as a way to obtain easy-access loans – for example, payday lenders or credit unions

The size of the local market

Despite its popularity with people from all walks of life, pawnbroking has traditionally been popular with those who regularly need small loans to tide them over but do not have access to all the products and services on the High Street. Even seemingly affluent people sometimes need assistance with regular expenses such as school fees or utility bills thanks to the recent ‘credit crunch’.

Research the types of customers that you intend to target and how well they are represented in your area by doing some market research. In your advertising and marketing campaigns, you could use this research as a guide.

There is no reason why you shouldn’t target everyone – the industry is making big efforts to establish itself as a mainstream money services business.

Competition – money services

You will need to determine whether your area has enough room for another pawnbroker, since there may already be others in the area. Despite the competition, you won’t have to be put off if you find there is local demand for pawnbroking services. It may even be the case that the industry is still growing in your area.

Among the three large national chains are Ramsdens, Albermarle Bond, and H&T Pawnbrokers. Over 420 stores are located throughout the country between them. The number of online pawnbroking firms that offer customers the opportunity to send in their assets has also increased in recent years.

If you target the ‘sub-prime’ credit market, you may face competition from other money service businesses (MSBs). Among them are:

• Specialists in ‘sale and buy-back’, such as Cash Converters and Cash Generator (some of these also offer traditional pawnbroking services)
• A number of businesses, including some online ones, specialise in buying unwanted gold and jewellery
• The Money Shop, among others, is a cheque cashing business and a pay-day advance specialist
• Doorstep lenders

Some of the people who might otherwise go to a pawnbroker can get low-cost financing from local credit unions.

Examine your local competition to see if other businesses offer money lending and financial services that are similar to your pawnbroking business. Check out Yell.com (categories ‘Pawnbrokers’ and ‘Cheque cashing’, maybe also ‘Credit and finance companies’) and other online directories to find out more about them. Ads in local newspapers and print directories may also be of interest.

Get to know your competitors as much as possible. Check out their advertisements on Yell.com, their websites, and perhaps visit their outlets. Establish the following for each of your main competitors:

• Services they provide
• Is there a minimum and/or maximum loan value policy?
• How much they charge, what their interest rate is and fees are
• Their staff’s knowledge and helpfulness
• How modern and smart their premises are – who seems to be their target customer
• If they offer pawnbroking services, what pledges they will accept
• Their opening hours
• Is there any other useful information – for instance, is the company a member of a reputable trade association?

Competition – retailing

Retail outlets like High Street jewellers, second-hand shops, and others may compete with you if you plan to sell jewellery, other unredeemed pawns, and perhaps a range of second-hand goods. Online retailers and eBay sellers may also compete with you depending on what you sell.

Researching the location of your outlet

It is very important to choose the right location for your outlet. Passing trade is likely to be your primary source of retail sales, as well as passers-by who notice the services you offer. Parking should be easy to find nearby and a lot of passing traffic should be available. Make sure no new road systems will bypass your outlet (or pedestrians), or that there are no plans to impose parking restrictions nearby.

Customer profile

A number of factors may influence the types of customers your business attracts, including:

• Services you provide
• Pawn items you accept
• Your business’s location and the surrounding area’s prosperity
• Your business’s and outlet’s image

The majority of pawnbrokers’ customers are traditionally from the least affluent socioeconomic groups. Unemployed people and those with low incomes may be among them. Despite the fact that people from all walks of life use pawnbroking services today, you may still find this to be the case for your business. There are a number of reasons for this change:

• A pawnbroking service can provide a short-term loan to tide people over until their next pay cheque
• Now viewed as a legitimate money service business (MSB), the industry has improved its image.
• If you are unable to get credit or don’t have a bank account, pawnbroking is an attractive alternative to the High Street banks
• Borrowing against an existing item may be more comfortable for customers
• On eBay, people have become accustomed to realising cash from their assets
• Banks and other mainstream lenders are now making it harder for people to get credit, while some small businesses are having trouble getting credit to increase their cash flow.

The pawnbroking transaction

In pawnbroking, items are pledged or pawned as security for loans to customers. You earn money by charging interest on the loans, so you’ll need to decide what interest rate to charge. It is estimated that the typical monthly interest rate for pawnbrokers is around 7% (‘simple’ rather than ‘compound’ interest). The amount of the loan and the rate at which your competitors charge may determine this.

Document fees are not uncommon – they can be fixed or linked to the loan size. If you charge a separate fee from the loan repayment amount, your paperwork should clearly distinguish the separate fee from the loan repayment amount.

Prepare a list of the items you will accept as pledges from your customers. Here are some examples:

• Jewellery and watches
• Designer handbags
• Musical instruments
• Expensive power tools
• High value electrical items
• Fine art and antique items

If you decide to accept unusual pledges, you might want to make it a point to do so. Pawnbrokers regularly accept cars or fine, rare, and vintage wines, for instance.

Jewellery and watches are the most commonly pledged items because they are valuable, easy to store, and have a strong second-hand market. Jewellery is the only pledge accepted by some pawnbrokers.

Accepting a pledge and making a loan

Making a loan to a customer begins with valuing the item they are pledging and determining the loan amount together. A pledged item’s second-hand value is typically 60% of the loan amount. Precontract information documents are required by law to be provided to your customers.

The borrower must read this before accepting the loan. Their rights, as well as the terms and conditions of their loan, must be outlined in a loan agreement. Pawn receipts are kept by your customers as part of their loan agreements. There is no maximum period for a loan, but the contract must last at least six months.

Redeeming a pawn

If your customer pays back the loan along with interest (and charges) due during the period of the contract, they can get their pawn back. You must notify your customer in writing that their pawn will be sold if, at the end of the agreed contract period, they do not repay their loan plus the interest. You must do this only if the loan is over £100. The customer has 14 days to repay you and redeem the pawn.

Your customer could renew his or her loan for another six months at the end of the contract period. Initially, they would have to pay any interest still due on the original loan. A new agreement would be drawn up.

Unfair relationships with borrowers – the legal position

You are required to follow consumer credit legislation when lending money to customers. An unhappy customer could legally challenge your credit agreement on the grounds that it is unfair to them, for example. Alternatively, they can contact the Financial Ombudsman Service. To avoid creating an unfair relationship between you and your customers, make sure your standard terms and practices are fair.

The Financial Conduct Authority’s website provides more information about consumer credit legislation. You can find information about your legal responsibilities as a consumer credit business on the website of the Financial Ombudsman Service. You should consult a qualified legal professional if you are uncertain about how to meet your legal issues or obligations under the consumer credit legislation.

Unredeemed pawns – your rights

The pledged item can be sold if your customer does not repay the loan. ‘Realisation’ is what the trade calls this process.

When an item becomes yours, it becomes yours in the following ways:

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

You do not own the item if you do not pay for it. Your customer must receive the difference between the amount of the loan and the value of the pledge when you sell it. The item must be sold at its true market value in order to be sold fairly. Your customer must make up the difference if the sale price is less than the loan amount.

Since your primary business is lending money, not selling pledged items, it’s preferable for all pawns to be redeemed. About 88% of pawns are redeemed, according to the National Pawnbrokers Association (NPA).

In the pawn trade, repeat transactions are common, so a customer who redeems a pawn may return to pledge it again at a later date.

Be careful not to create an unfair relationship between you and your customers through your terms, conditions, and business practices. Borrowers have special rights under consumer credit laws when the lender-borrower relationship is deemed unfair. On the Financial Ombudsman Service website, you can learn more about unfair relationships and consumer credit legislation.

Decide which services to offer

You may also choose to provide a range of other services in addition to your basic pawnbroking business, including retail sales. These may include unredeemed ‘pledges’, but also other goods like new jewellery. Some or all the following may be included.

Money services

• Cheque cashing – offers an alternative to paying into a bank account or building society when someone receives a cheque from an organisation such as HMRC. To offer this service, you might hire a cheque encashment specialist (or set up a cheque cashing agreement with a bank)
• Pay-day advances – be aware that the government has tightened the regulations on payday loans and introduced a cap on interest rates
• Money transfers, for example as a sub-agent for Western Union
• Pre-paid credit cards
• Secured and unsecured loans
• Foreign currency exchange services
• Selling and buying back used goods, a sort of middle ground between pawnbroking and second-hand goods retailing

Other services

• Taking advantage of high gold scrap prices to buy customers’ gold jewellery by weight for cash
• Jewellery cleaning, engraving and repairs
• Valuations
• Specialist jewellery insurance services

It will have been discovered in your market research what other money service businesses (MSBs) in your area offer. Perhaps you can provide a service that isn’t available locally. If you want to attract potential customers to your outlet, you might offer a broader range of services. Customers may return to your outlet at a later date to use your other services if they pawn an item at your outlet.

The right image

In order to attract potential customers, your business must present the right image. A negative image of pawnbroking existed in the past, but it has improved over the last few years thanks to the National Pawnbrokers Association (NPA). In addition to having well-dressed, helpful, and polite staff, your business should be professionally run. To help your customers manage debt, make sure you provide them with a debt advice leaflet.

The interiors of many independent pawnbroking outlets are cluttered, the lighting is poor and the window displays aren’t inspiring. Ensure that your shop’s interior is well lit and that your window displays are attractively arranged. It is possible that you decide to open a pawnbroker or MSB that looks and feels more like a bank or financial services office than a jeweller’s shop.

Best practice

Promoting the right image for your pawnbroking business will be easier if you follow industry best practices. The law requires you to pawn all property with ‘reasonable care’. Pawned items are not required to be insured, but you might consider offering compensation in the event that an item is lost or damaged. Keeping goodwill with customers would be beneficial. Increasing the interest rate on a loan can cover the cost of insuring pawned items. Members of the NPA can take advantage of the Customer Compensation Plan, which is an insurance-backed compensation scheme aimed at promoting goodwill among customers.

Even if you do so unknowingly, you should never take in any stolen goods. You can prevent this from happening by verifying customers’ identities, monitoring transactions carefully, and keeping very good records. If you have ever been duped into accepting a stolen item, it will help demonstrate that you acted in good faith. Joining the Safe Seller Scheme will allow you to check whether items brought in by customers have been reported lost or stolen against the online database. The CheckMEND website provides more information about the program.

Advertising your business

It’s important to let your potential customers know about your business and the services you offer, no matter what your business model is.

Promotion of your business can be accomplished in a number of ways:

• Local newspapers and directories can be used to advertise
• Publish a website showing the services you offer. Potential customers could use online tools to find out how much they can borrow against their goods, or how much their gold is worth
• Print some leaflets and distribute them in your neighbourhood or send them by mail
• Your store’s front should clearly indicate your service offerings to passers by
• Inform people about pawnbroking through social media such as Facebook and Twitter

You can promote your business by joining the NPA. The NPA logo can be used on stationery and premises and is listed in a searchable online directory. Your professional image will be enhanced as a result. On their website, you can learn more about the NPA’s services for members.

Franchises

Starting out from scratch or buying an existing business can be difficult. Franchising is a logical step between the two risky options. Franchises allow you to start your own business while benefiting from the experience, resources, and perhaps even the name of a successful company.

There are several key points that are common to most franchise schemes, although they may vary in detail:

• Franchise holders are self-employed but use the franchisor’s brand (corporate colours, logos, trade names, etc.)
• The franchisor will charge you a fee in return
• Arrange start-up finance
• There are certain obligations and minimum standards that both you and your franchisor must meet

Both you and your franchisor will sign a franchise agreement that specifies all the above points. Also included in the agreement will be any territorial exclusivity you are entitled to and the minimum period for which the franchise will run.

A franchise agreement should be carefully inspected before you sign it to ensure that the terms are reasonable. Your solicitor should review the contract before you sign it. On the Franchise Info website, you can learn more about franchising. The British Franchise Association (BFA) also provides information.

Conclusion

In conclusion, embarking on the journey of starting a pawnbroking business in the UK entails navigating a unique landscape shaped by specific legislation and regulations. The Pawnbrokers Act 1872, updated by the Consumer Credit Act 1974, governs the operation of pawn shops in the country. Complying with these legal requirements is crucial for establishing a reputable and law-abiding business.

Obtaining the necessary licenses and registrations, conducting thorough background checks on customers, and adhering to strict reporting and record-keeping obligations are fundamental steps for success in the UK pawnbroking industry.

Additionally, staying abreast of any changes or amendments in the regulatory framework ensures ongoing compliance and builds trust with customers. By intertwining sound business strategies with an understanding of UK pawnbroking legislation, entrepreneurs can forge a thriving enterprise that caters to the financial needs of the local community while upholding the highest ethical standards.