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20-03-2017, 06:02 PM
Pawn shops provide loans but does not accept deposits. For them to be able to do this, they have to either have plenty of cash, or borrow the cash from another party (bonds and/or bank loans). This is why all pawn operators have high debt. In fact, the higher their debt, the greater their ability to do more business. If there are many people who wish to pawn their gold to you, do you have to cash to lend?
What pawn shops accept in return for a loan is collateral, most of the time being gold. With every loan made as customers pawn their gold (or watch and handbag), customers are obliged to make monthly interest payments over a period of six months, and by the end of the period, repay the entire principal borrowed. So the more customers (or volume of business) a pawn operator has, the higher its receivables should be.
So think of pawn shops as banking services/substitutes.
The increased profit and margin could be a result of lower interest rate on its debt (sibor actually fell, albeit marginally, from Jan to Dec 2016) and/or higher interest charged on its loans. I used to see pawnshops hawking 1%-1.5% interest per month on their loans, I'm not sure if this is still the case? No longer see big advertisement posters outside their shops.
Higher gold price can allow for higher revenues since a collateral of higher value allows for a larger loan. However, I think profitability depends more on how much the pawn operator is paying for its cash vis-a-vis how much it is charging borrowers for it. I.e. it's 'net interest margin.' It was boom time for the pawn operators a few years back due to very high gold price and very low cost of funds. Now gold prices has been stable for the past 2 years and cost of funds is projected to go up. For a pawn operator to grow its profit and/or margins, it has to be able to raise the interest it charges its borrowers. Given the heavy competition, I won't count on the likelihood of this.
Perhaps the only situation where pawn operators will prosper, given the subdued value of collaterals and higher cost of funds, is a recession triggering job losses forcing people to pawn their gold as a means of last resort. I thought the improved FY16Q4 results of most pawn operators is because of this.
What pawn shops accept in return for a loan is collateral, most of the time being gold. With every loan made as customers pawn their gold (or watch and handbag), customers are obliged to make monthly interest payments over a period of six months, and by the end of the period, repay the entire principal borrowed. So the more customers (or volume of business) a pawn operator has, the higher its receivables should be.
So think of pawn shops as banking services/substitutes.
The increased profit and margin could be a result of lower interest rate on its debt (sibor actually fell, albeit marginally, from Jan to Dec 2016) and/or higher interest charged on its loans. I used to see pawnshops hawking 1%-1.5% interest per month on their loans, I'm not sure if this is still the case? No longer see big advertisement posters outside their shops.
Higher gold price can allow for higher revenues since a collateral of higher value allows for a larger loan. However, I think profitability depends more on how much the pawn operator is paying for its cash vis-a-vis how much it is charging borrowers for it. I.e. it's 'net interest margin.' It was boom time for the pawn operators a few years back due to very high gold price and very low cost of funds. Now gold prices has been stable for the past 2 years and cost of funds is projected to go up. For a pawn operator to grow its profit and/or margins, it has to be able to raise the interest it charges its borrowers. Given the heavy competition, I won't count on the likelihood of this.
Perhaps the only situation where pawn operators will prosper, given the subdued value of collaterals and higher cost of funds, is a recession triggering job losses forcing people to pawn their gold as a means of last resort. I thought the improved FY16Q4 results of most pawn operators is because of this.