The Dos & Don’ts of Salon Financing
August 22, 2019 | Last Updated on: March 29, 2023
August 22, 2019 | Last Updated on: March 29, 2023
Applying for and getting a hair salon loan is a pretty easy process if you plan correctly and are organized. Organization is critical when seeking financing, but also in the long-term success of your business. Overall revenues for all salon industry services (hair, skin, nails) plus salon retail sales grew only 2%, per the 2017 Professional Salon Industry Haircare Study from Professional Consultants & Resources, the leading salon industry consultants and premier data source. That is why it is critical to find the best business financing possible when opening or looking to improve upon an existing salon.
Financing a beauty salon depends on maintaining a positive cash flow. That’s despite having high overhead costs and an income that can be slow or inconsistent – especially in the first few years of business. To improve their cash flow, most beauty salon owners seek outside funding, but soon realize that traditional forms of financing, such as bank loans, are difficult to obtain.
The answer to this dilemma for many salon business owners has been to seek alternative methods of financing. In this article, we cover exactly what salon owners need to know about financing for their salon.
DO: Invest in yourself and your salon. This will require you to develop a plan for specifically what you want to expand on in your salon.
You can also take into account that you can finance for different reasons. Does your salon need some structural updates? Styles and trends change so you may need to finance changing the look of your salon. This could be as simple as a basic spruce up of the salon or expanding the space. You can also finance investing in better equipment or technology that can improve your business. Even something as simple as a new set of mirrors or chairs can be a huge upgrade for your clients and your bottom line.
Depending on the type of financing you choose, you could also use the financing to further your education or to develop a training program for your stylists and other employees. Training programs for all levels of experience can lead to improved efficiency which leads to bigger profits. With profit margins slim, you have to know if the improvements will be cost-effective.
DON’T: Get information about where to invest from just one place. There is a lot of helpful online loan and financing options including industry-specific information just for salon owners. You need to do your due diligence in researching what is the best investment for your business.
DO: Have a business plan and make sure that you follow it closely. It is your map for the future of your business. Without a plan, you have no idea where your business is going.
As part of the application process, a lender will want to review your business plan to determine whether it can assume the risk of loan approval with a reasonable expectation of consistent repayment, with interest. Your business plan should have detailed research supporting your business model, target customer base, mission statement, competition, projected future goals, sales, and profits.
DON’T: Don’t forget to have your information organized and ready. Hair Salon and Spa Service Industry loans are many and varied, so it is easy to speak with a consultant to find one that fits your business model. When applying for Hair Salon and Spa Industry financing, most banks and lenders require you to provide your tax records, your business plan, sales history, your projected earnings, your inventory and equipment, and who you use as suppliers.
DO: Know what types of financing options are available for your beauty salon. By educating yourself, you will end up with the financing that works best for you.
Unsecured loan or line of credit. If you don’t have the initial collateral to help secure a loan, you may look into securing this option. There may be more stringent financial requirements and your credit score may be used since the lender will take on 100% of the liability of the loan.
Lines of credit are based on assets. Often, hair salon and spa service industry businesses arrange asset-based lines of credit with lending institutions. This way, the hair salon or spa receives funding based on the value of the assets and equipment used by the company. The higher the value of the equipment offered up as collateral, the greater the available line of credit.
Small Business Administration Loans. Traditional financing options for hair and spa service companies are the Small Business Administration’s (SBA) 504 and 7(a) loan programs. The SBA usually backs 75% of the loan, which eases the amount of risk that the banks or other lending parties assume in financing a hair salon or spa service industry business. To receive this type of funding the borrower must meet the SBA loan eligibility requirements and adhere to the SBA Standard Operating Procedures for loan underwriting. The SBA 7(a) loan is similar but it is designed for other uses like refinancing existing debt, purchasing supplies or equipment, or expanding your business. Although the 504 and 7(a) are quite similar, there are differences in minimum and maximum amounts you can borrow, the terms of the loan, the interest rates, and the amount of down payment required of the borrower.
Conventional Loans. Conventional loans typically offer flexible terms and pricing for hair salons and spa service businesses, and lending institutions can give even lower pricing based on the strength of the loan application. Conventional loans are usually arranged through banks. If your business is looking for flexible terms and pricing, conventional loans offer both, because the lenders can give lower pricing for more robust requests. But the challenge is that your finances have to be in absolutely pristine condition before you apply if you’re hoping to get those favorable terms.
Conventional loans can be arranged through traditional banking institutions and even non-bank lenders. Conventional loans are not guaranteed by a third party, so the bank or lending institution assumes the full risk of the loan. Because of this, the credit standards on conventional loans are typically higher than other forms of financing or will be secured by collateral such as a piece of equipment or a personal residence.
Seller-Carry Finance. If you are looking to buy an existing hair salon or spa industry business, it is usually possible to arrange the terms of the pricing and financing with the owner. Instead of getting the full price, both parties negotiate the pricing, the period upon which the transaction will be completed (typically 3 to 5 years), and the rate of interest on each payment made. The added advantage to this for financing is that the previous hair salon or spa owner is usually willing to oversee the training of new staff during the transition period to ensure the future success of the business.
Merchant Cash Advance. A merchant cash advance is not technically a loan, but it is an advance of cash that’s based on your business’s credit card and other future business receivables. Financing companies offer merchant cash advances based on the volume of credit card sales and business receipts a hair salon or spa has over a given period.
To qualify for a merchant cash advance, the hair salon or spa must have a physical establishment, as well as an established record of credit card sales and other business receipts. The higher the volume of sales, the greater the amount of the cash advance. Merchant cash advances are typically considered to be short-term funding. They can be arranged quickly, and also have the benefit of providing cash upfront. What makes this type of financing appealing to many salon owners is the fact that it is paid back based on a percentage of the salon’s future sales, making it an affordable way for many salons to expand.
Still not sure what financing option is the best for you and your business? Check out this handy guide from Biz2Credit on finding the best loan that fits your small business’s needs.
There are many funding options available to salon or spa owners. Your beauty salon can benefit from many of these options if you handle them the right way. Keep these dos and don’ts in the back of your mind, and you’ll be well on your way to growing your salon business.