Beauty Salon Financing - What You Need to Know to Succeed
Demographic changes in the United States over the past 20 years have led to profound consumer habit changes in personal beauty care. With Baby Boomers aging and Millennials becoming the largest population segment, fashion has a new face.
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In addition to these demographic shifts, customers are spending less in salons; mega-beauty salons are displacing smaller boutique salons; and high-end hair care products - once the exclusive domain of professional salons, and a significant portion of their sales - are being diverted into supermarkets, online retailers, and mass drug store chains, where they are sold at deep discounts.
Despite the headwinds to this portion of the service industry, beauty salons continue to expand, and even grew during the 2008 recession. While growth in the past 5 years has been capped at approximately 3.3%, there are still signs of optimism and resiliency within the industry.
Now, more than any time in the past 50 years, is it vitally important to properly finance a beauty salon.
Beauty Salon Loans - Background and Overview
According to beauty service industry researchers Professional Consultants & Resources, overall revenues for all salon industry services (hair, skin, nails) plus salon retail grew only 2%, per the 2017 Professional Salon Industry Haircare Study (the latest study available):
Total U.S. salon services and salon retail sales grew by 2% to $63 billion. Nearly 257,000 salons and barbershops in the United States use and sell salon hair care products. However, the salon count declined by 5%, as many traditional, commission-based salons closed, and beautiful, large, new salon suites opened.
Looking at the 5-year chart below, we see that growth in the beauty salon segment is contracting, yet still on a positive, upward trend. It is estimated that the industry will accelerate growth as younger clients become more financially stable, with more disposable income for professional care at beauty salons. However, there are few industry experts disputing the domination of the mega salons. When it comes to beauty salons, bigger is better. This is something to keep in mind when considering a business loan for your beauty salon.
Beauty Salon Financing - Trends and Drivers of Style
Fifty years ago, most major style trends were generated by celebrity figures. Consider how First Lady Jacqueline Kennedy influenced almost an entire generation of women to adapt her hair style and wardrobe look. Or more recently, remember Jennifer Aniston's 1990s "Rachel" hairstyle? These were iconic fashion movements that captivated millions.
For better or worse, those days are gone. Social media has splintered the attention of the world's fashionistas. According to Franchisehelp.com, a company that offers information on beauty salon franchise opportunities, 82% of women now believe that social media drives fashion trends. For salon owners and stylists, the velocity of change offers a watershed moment: Instead of women (and, increasingly, men) changing their styles every few months, many are now changing styles and color on a daily basis.
The Small Business Development Center Network says:
- The largest households and older householders are the best customers of personal care services like haircuts, massages, manicures, and facials
- Householders aged 35 - 64 spend 8 - 14% more than average on this category
- Married couples without children at home (most of them empty-nesters) spend 25% more than average on personal care services, while those with school-aged or older children at home (the largest households) spend 31 - 37% more than average
According to a Pro Consultants report on US beauty salons:
- Haircoloring remains a vital anchor service, attracting clients for other services like cuts, styles, perms, and straighteners
- Haircoloring services grew only 2.6%, primarily from Boomers needing gray coverage and young adults' demands for fashion hair color like blonding, highlights, baby-lights, balayage, sombres, and shadow roots
- Vibrants, vivids, and pastels slowed
- Keratin straightening services grew slightly
- Cutting and styling grew 2.3%, as clients visited less frequently
- More customers got cut and styled at lower prices, at family-economy chains and rentals
- Blow-dry bars grew very strongly at a rate of 25%, in both revenues and number of locations
Beauty Salon Financing - Investing in Change
The drivers in a beauty salon for revenue growth continue to be haircuts, styling, and professional coloring. However, there are pressures here as well, as many Baby Boomers have embraced going gray naturally, and most Millennials are not quite wrestling with that decision yet. Additionally, men are becoming a more prominent part of revenue consideration as social attitudes towards men's personal care change.
As these demographic shifts take place, salon owners and stylists are being confronted with changes in their service requirements. This could be a defining moment for salons and their employees. Investment in training and monitoring social media trends can be exhausting, but the risk of not keeping up can be fatal. There was a time when style inspiration came mainly from magazines; these days, a computer with virtual or augmented reality apps is the new standard. Identifying trends and delivering them to clients is the new challenge for stylists and salon owners.
Investing in new technology and training will likely be one of the biggest financial challenges for the beauty salon industry in the next 10 years.
Loans for Beauty Salons - How to Grow Your Salon Business
The beauty salon industry is changing. Growth outlook has been declining since 2012, yet there seems to be change on the horizon. So how can you grow your salon business? Let's look at the growth areas projected based on demographic shifts and social change.
According to the Bureau of Labor Statistics, the primary service segments of the market employ nearly 1 million people, with strong growth expectations. Clearly this is an industry on the rise. They observe:
- Barbers, hairdressers, and cosmetologists: 656,000 employed in 2014, 10% expected growth by 2024
- Manicurists and pedicurists: 113,600 employed in 2014, 10% expected growth by 2024
- Skincare specialists: 55,000 in 2014 with 12% expected growth by 2024. Specific growth expected for businesses serving men
- Massage therapists: 168,800 in 2014 with a whopping 22% growth by 2024!
Avoiding the use of potentially harmful chemicals and the skills required to achieve a professional outcome in hair color ensures this service will remain in the domain of stylists and colorists. The do-it-yourself (DIY) trends have some limitations, and hair color is one of them.
Despite the micro-trend toward natural gray for Boomers, there are still tens of millions of Boomers who wish to color those gray locks.
Men Enter the Beauty Salon
Men's hair coloring and hair removal are two fast-growing segments of this service sector. Men are also more inclined to follow advice of a professional and purchase products from the salon at point of service. One notable trend is sports salons and other places that combine men's interests with styling. Some popular services for men include skin care, coloring and hair waxing.
Overall Outlook and Financing the Modern Beauty Salon
Looking at the data, an owner or potential investor may wish to evaluate some pretty clear secular trends when considering taking a loan for a new beauty salon or financing expansion of an existing salon.
While traditional drivers such as professional coloring and cuts continue to stabilize salons, smaller salons and the mall-based chains are being squeezed out of the market as clients seek a variety of specialty services in larger, diversified salons. At the same time, a large segment of the marketplace is looking for more value in their personal care services; those with families are most inclined to look for value pricing, putting downward pressure on per head service pricing.
The velocity of change in styles driven by social media has put pressure on owners and stylists to learn and adapt at a fast pace. This shift has also made it important to have internet access and media in the salon to evaluate and follow style trends in almost real-time.
Financing a Beauty Salon Interior Renovation/Expansion
Salon owners may wish to consider expansion to accommodate additional services and/or decor renovations to make existing shops more conducive to client demands. Think of the above examples of men gravitating toward sports-themed barber shops and families with small children seeking value-oriented venues. It is becoming more common to see beauty salons creating multi-themed environments to cater to the specific tastes of major client segments.
Understanding what a lender looks for in making a loan is the first thing you should consider when seeking funding for your beauty salon. Your credit profile, which includes your personal and business credit history, are top considerations for lenders.
The other important criterion is your ability to repay your loan. If you ask a bank or other lender to finance your beauty salon, they are going to ask you to show them how you intend to pay them back.
Tip for determining your ability to repay your beauty salon loan
A simple calculation will help you determine your ability to repay your loan for your salon. It's called a Debt Service Coverage Ratio, or DSCR for short. A Debt Service Coverage Ratio Calculator will help you understand how a lender will look at your loan application. Basically, your DSCR calculates your ability to repay your loan. Take a moment to see a more detailed description of debt service coverage ratio.
Top 4 Financing Solutions for Beauty Salon Owners to Acquire a New Business or Expand an Existing Salon
Small Business Administration (SBA) Financing
The SBA is an ideal solution to finance the purchase or expansion of an existing beauty salon. Keep in mind that unless the business you are planning to acquire or expand is profitable, it will be more difficult to obtain top tier financing like an SBA loan.
If your target business is not profitable, you will need to make a compelling turnaround argument and demonstrate your expertise within the industry.
Traditional Bank Business Loan
If your planned acquisition has a high DSCR and you have extensive experience operating a salon, you may qualify for a conventional bank business loan.
Rollovers as Business Startups (ROBS)
ROBS allow you to use funds from a qualified retirement account like an IRA or a 401(k), and roll the funds into a company you own. It is not considered borrowing from your retirement account, and it allows entrepreneurs to use their business as a tax-deferred investment.
Top Options for Inventory Financing
Merchant Cash Advance
The merchant cash provider gives the salon a lump sum cash advance, and the salon pays back the advance through a daily or weekly percentage of its credit card sales.
Business Line of Credit
A business line of credit is like a cross between a loan and a usiness credit card. Like a business loan, an unsecured line of credit provides business financing that can be used for general business expenses. However, with a line of credit, there is no lump-sum disbursement; a business owner borrows only what is needed and only pays interest on the amounts borrowed.
Unsecured Business Loan
Unsecured business loans are a type of business financing that do not require the borrower to pledge collateral (such as inventory, equipment, or real estate). This type of loan is issued solely on the borrower's creditworthiness.
Financing a Real Estate/Building Purchase
To rent or to buy is perhaps the biggest decision of all when it comes to operating and financing your beauty salon. Since the success of a beauty salon is largely based on location, it's in everyone's interest to consider ownership of the land and building that houses your salon.
But you might be better off renting. If you can get a long-term lease on the building with renewal options, and the rent is substantially less than the monthly debt service of a real estate loan, then renting is the better choice. After all, having more disposable cash each month means you can reinvest it in your business for new inventory, employee training, or expansion.
Consider these questions first: Would a purchase make financial sense? Can you afford to buy the property? How is your Debt Service Coverage Ratio?
Top 3 Options for Real Estate Financing
If you decide that a purchase is the right choice, here are a few real estate financing options to get you started.
Commercial Loans/Bank Loans
One of the best places to look for a loan is at the bank you where you have your business accounts. Banks are the most popular source of real estate financing and may offer the best terms to financing your beauty salon real estate purchase.
SBA 504 Loan
The SBA has programs specifically designed for companies to acquire the real estate that the business occupies. The small business must occupy at least 51% of real estate asset and comply with federal business size standards. The business cannot have sales over $6 million or employ more than 500 workers.
Expansion Capital for a Beauty Salon
Top loan options for financing a beauty salon expansion:
Naturally, you would consider a franchise loan as your first option if you are planning to open a franchised beauty salon.
Business Line of Credi
Keeping a business line of credit should be a priority for beauty salon owners, considering the pace of change and the need to have the latest products. A credit line is ready capital that can be used on a moment's notice, when opportunity knocks.
Merchant Cash Advance
As discussed above, the merchant cash provider gives the salon a lump sum cash advance, and the salon pays back the advance through a daily or weekly percentage of its credit card sales. This makes it a good option for financing things like inventory.
When it comes to financing an expansion, keep in mind that a merchant cash advance often carries higher costs and fees than other forms of loans and borrowing. That might make it a good way to stock up on shampoo, but consider it more carefully for larger-ticket expansions.
If we have proven one thing in this discussion, it's that operating a beauty salon is about staying current with consumer demand, seasonal changes and newly emerging trends. Having working capital on hand can make a world of difference in the success of your salon.
One of the biggest mistakes business owners make is not ensuring adequate working capital. The best time to secure financing or working capital from third parties is when your business is thriving. After all, banks and other lenders want to know they are taking good risks when lending. Don't wait until your business is in desperate need of capital to look for funding; establish credit lines as soon as possible and as often as you need
Top Sources of Working Capital Financing for Beauty Salons
SBA 504 Loan
It's an often overlooked fact, but the Small Business Administration has several loan programs that provide small businesses with loans for working capital. That means you may use the loan for any business purpose.
Business Line of Credit
It cannot be stressed enough that a business line of credit should be a part of every small business's financing portfolio. A business line of credit is standby, ready cash when needed. You don't pay any interest until you use the credit line, which makes it one of the most beneficial financing instruments for a fast-paced business like a beauty salon.
Business Credit Card
Somewhat similar to a business line of credit, business credit cards are useful for taking advantage of opportunities and don't accrue interest charges until you draw on your credit line. In addition, most credit cards offer rewards and cash back, so you can accrue benefits while buying the things you already need.