Loans for Beauty Salons Looking Good!
The U.S. hair care services industry includes about 86,000 establishments (82,000 beauty salons; 4,000 barber shops) with combined annual revenue of about $20 billion, according to a 2014 report by the Small Business Development Center Network.
A typical salon, which occupies about 1,000 to 1,500 sq. ft. and is located in a mall or strip center, offers haircutting and styling, coloring, shampooing, and perms. Providing from 5 to 15 percent of revenue, hair care product sales are an important revenue source for many salons. (Margins are higher for hair care products than for services.) Many salons also offer nail care, facials, makeup, bikini waxing, massage, tanning, and other types of spa treatments.
Establishments that long catered solely to women have now begun offering services to men. For instance, 18|8 Fine Men’s Salons in San Antonio, Texas, offers specials for grooms and members of their wedding parties who book a day of pampering. The offerings include haircuts and styling, straight-razor shaves, manicures, pedicures, neck and shoulder massages, and… draft beer!
A salon owner has ultimate control of every aspect of the operation. They are responsible not only for the servicing of customers, but also for handling the salon’s branding, marketing, hiring and training of staff, maintaining cash flow, and generating a profit.
Owning a salon is an aspiration for many entrepreneurs, but the costs of running a business have the potential to turn a dream into a nightmare if the establishment is underfunded. From hiring talented employees and maintaining top quality equipment to keeping staff educated on the latest techniques, salon owners often find themselves in need of additional spa and salon financing.
Lenders are willing to provide capital to spa owners for a variety of business purposes:
- working capital,
- remodeling and upgrading spa equipment,
- purchasing beauty supplies,
- navigating through seasonal peaks and valleys of cash flow, and
- marketing, including gift cards for Valentine’s Day, Mother’s Day, and other gift-giving occasions.
With small business loan approvals at big banks ($10 billion in assets or more) and institutional investors climbing to post-recession record levels, salon owners have a better chance today in securing capital than they did just a few short years ago. In fact, according to the latest Biz2Credit Small Business Lending Index (March 2018 figures), big banks are authorizing more than one-quarter (25.6 percent) of funding requests that come into them. Institutional investors, which have become a solid force in the small business credit marketplace, granted almost two-thirds of the loan applications that came to them.
Many salon owners are able to obtain Small Business Administration (SBA) loans. While the federal agency itself does not lend money from its balance sheets, it does provide a government guarantee against default for the SBA’s partner financial institutions. Regional and community banks make SBA loans available to entrepreneurs who might not be able to securing funding were it not for the guarantees.
Loan decisions made by banks usually hinge on the borrower’s credit scores. A business owner with a credit score of 650 or better is likely to be able to obtain capital from a traditional source. For individuals with less than stellar credit histories, securing money from a bank in all likelihood will be challenging.
Fortunately, financing available for companies with bad credit histories. Alternative (non-bank) lenders can provide cash quickly and are more willing to accept risk than any bank. However, the cost of capital comes at a much steeper price in the form of higher interest rates.
A salon owner must weigh the greater cost of capital against the opportunity costs involved in not borrowing. For instance, if the opportunity to expand occurs because a storefront in a prime location becomes available, it may be imperative to secure funding to sign a lease and move up the expansion timetable. An alternative lender can help a spa owner take his or her business to the next level, but will require swift repayment at rates often greater than 20 percent.