Over the past thirty years the UK's pawnbroking industry has experienced massive year-on-year growth and
the number of outlets has grown from around 50 in the early 1980s to around 900 today. With the exception of Albemarle & Bond and Harvey & Thompson, the country's two large chains with around 200 shops between them, the sector is made up of family businesses – but aggressive acquisition strategies by the two big players are forcing the consolidation of a heavily fragmented industry.

The sector is still small in comparison to its pre-welfare state heyday when there were more pawnbrokers than pubs on Britain's streets. Still, the industry estimates it has a turnover of around £460 million today – an increase of between 300 and 400 per cent on a decade ago.

And the figures suggest the industry's good run is set to continue if the credit crunch has the same effect as the recession of the late 80s when borrowers struggling to secure credit from the banks looked to pawnbrokers.

Des Milligan, chief executive of the National Pawnbrokers Association (NPA), says, "Business has increased since the credit crunch has put real strain on family budgets. There are no centralised stats, but we know from many of our members that their loan books have increased by 25 to 35 per cent in the past few months."

Annual growth in the industry in 2007 was around ten per cent and a survey conducted by the NPA among its members in April this year found that 96 per cent reported an increase in business over the previous six months and a similar number anticipated a further increase in business over the next six months.

Milligan says, "More families are finding that their bank will either not grant them a credit card or extend their line of credit as they have tightened their lending criteria. It is much less expensive to go to a pawnbroker to borrow small amounts of money for a short time than risk going into an unauthorised overdraft and paying £30 for each letter the bank sends you."

Like a bank a pawnbroker earns income from the interest that is charged on the loan secured by a pledged item. A pawnbroker accepts goods into pawn based on an on-the-spot valuation (15,000 of which take place across the UK every day) but the practice of lending against clothing, furniture and carriage clocks has become a rarity and nearly all of the UK's pawnbrokers trade only in jewellery.

Haywood Milton, managing director of the Liverpool-based Miltons chain of pawnbrokers, says, "We used to take in all sorts of things – lace table cloths, alarm clocks and gold teeth – but this is a very clean and simple operation now, a jewellers and a pawnbrokers, because it can all be secured in a small space."

A pawnbroker's customer is entitled to redeem their item by payment of the original loan plus the monthly interest due (which can range from two per cent to eight per cent) at any time during the contract period (normally six or seven months). If the customer doesn't renew their contract or redeem the item within that time the broker can take steps to dispose of the goods. After the original loan, interest and other business costs have been deducted, the balance from the resale is payable to the original customer.

Contrary to popular belief, it is in the pawnbroker's interest for borrowers to redeem their goods. Milton accepts several hundred items per day across the chain of four shops, farming out loans from £10 to six figure sums, and maintains a redemption rate of 90 per cent. Seventy-five per cent of its business is repeat custom, often through second or third generation customers.

"The amount we can sell an item on for structures the basis of the loan but we don't gain if we end up selling something. It means we have lost a customer that can no longer borrow against that item. We would be happy if it was a 100 per cent redemption rate because we make our money on the interest," he explains.

Registered pawnbrokers need a consumer credit licence to operate and are subject to scrutiny by the Office of Fair Trading (OFT).

Milton says, "The OFT has never had a complaint about a pawnbroker. That is the greatest testament to our industry keeping itself in order. If we were the rogues that you see in films from Dickensian times we would have complaints left, right and centre."

Milton employs 70 staff across four shops including full-time valuers and two on-site goldsmiths to recondition jewellery for sale in he retail arm of the business. He says a high level of skill in valuation is needed to make a sound decision concerning the size of the "lend". The pawnbroker who doesn't have that skill can easily make costly mistakes. "Expert valuers are like barristers in the legal world," he says. "They give their opinion and that's it, you can't argue with it. But we can train someone up in two weeks or so for regular gold items."

Miltons stores are busiest over Christmas when customers visit the retail arm of the business for discounted jewellery and take their goods out of pawn: "People want to wear their finery in front of granny but come January they are pledging because they need the money for the bills. It's very predictable."

Sporting events can make for a busy time at Miltons too, with loans taken out to buy tickets for the World Cup or a Liverpool vs Manchester United final. But the most lucrative seasonal blip? "When the tax is due," says Milton. "We give out a lot of big loans on big money items to people clutching a tax demand that needs paying that day."

Interest rates at Miltons vary between two per cent and six per cent a month, the bigger the lend, the lower the rate, and customers must pay a minimum of the first month's charge. Milton says, "If you work it out as an APR it can be a shock but an APR is a wholly misleading figure when you are talking about short-term loans.

"There are no separate set up fees and no default fees. It's a very transparent loan.

Where else could you borrow a thousand pounds and pay back £1,040 a month later?

While the number of pledges made at Miltons has reduced, those that are made are of a much higher value. The business has as much as £750,000 on loan against Rolex watches at any one time.

"We are seeing a lot more of the five and six-figure loans now," he says. "These people are perfectly asset wealthy but cash is the great problem. Over half of the loans that are taken out aren't to pay a bill, they are to keep up the
normal standard of living, to go on holiday as they used to, to buy a new car because they haven't for three years or to go out for a weekend.

"We do see some increase in business in a recession and I do think we are in one or on our way to one. Property people might suddenly need to get their hands on ready cash to pay off a contractor or to pay for a property that they've bought at auction. That's exactly how to use a pawnbroker. If you want to borrow money for a year, don't
come here; but for immediate short-term borrowing, come to us."

With an average lend of £120 to customers in the C2, D and E socio-demographic groups, a non-tiered interest rate of eight per cent and a redemption rate of about 78 per cent, Aimlisted Harvey & Thompson (H&T) operates a very different business model across its 100 shops.

Established in 1897, H&T is the UK's largest pawnbroking business by size of pledge book (£27.8 million in 2007). The group reported a 79 per cent jump in halfyear profits this month after opening new stores and benefiting from higher gold prices. And finance director Laurent Genthialon says it's wrong to assume the economy is responsible for profits growth to £5.5 million.

He says, "We don't agree with the general view that pawnbrokers do well out of a recession. A lot of our customers are not in the economic cycle, therefore when the value of property goes down, it doesn't affect them."

The group has ambitious plans to open more than 200 shops over the next few years but Genthialon admits acquisitions have become more difficult as potential vendors' profits have been artificially hiked by the current price of gold. He says, "In the current climate, with a very high gold price, vendors have unrealistic views about the value
of their business.

"They do not understand that if they make an exceptional profit through scrapping some of their gold we cannot necessarily pay for that. The fact is, they don't understand the words 'sustainable profit'."

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