How does a pawn shop business make money?

People often picture a pawn shop as a store that sells used goods. In practice it is part lender and part retailer. Customers bring in an item, the shop lends against it, and the customer either repays and takes it back or leaves it. That cycle feeds several revenue lines. If you plan to buy one, you need to know which lines carry the business, because the risks differ.

Loan charges

When a customer borrows against an item, the shop charges for the loan. Ask how charges are recorded: when they count as earned, and how unpaid charges are handled. A steady base of repeat borrowers is quite different from a few large loans. Ask which kinds of goods are most often pledged, and how often customers reclaim them. Your accountant can read this from the ledger.

Resale of forfeited and purchased goods

When a loan is not repaid, the shop may end up owning the item and selling it. It also buys goods outright from people who simply want to sell. Resale depends on the shop’s skill in judging goods, its location and how quickly stock turns. Check how inventory is counted and whether slow items are marked down in the records.

Gold and scrap

Many shops also take in jewellery and sell the metal for scrap or to refiners. This income moves with the market, so it can swing from one period to the next. A buyer should ask how much of recent results came from this line, and whether the shop would still do well without it.

Reading the books

Ask the seller to split results by line and to explain any unusual period. Compare the loan ledger, the bank deposits and the financial statements so they tell one story. What a shop is worth to you is for you and your advisers to judge, not for this page.