One of the most challenging parts of salon ownership is securing funding to start your business or expand it later down the line. Or in cases of hardship, like a global pandemic, to help lift the business out of a financial hole. However, no matter what stage a business may be in, many salons find funding difficult to secure.
The Reality of Business
Funding issues start with the high risk of failure of the average small business. According to data from the Bureau of Labor Statistics, around 20 percent of companies fail within the first year of opening their doors, 50 percent by the fifth year, and 70 percent at the decade mark. These may be alarming numbers for present or prospective business owners, let alone their financial lenders. However, the relatively high failure rate within the first decade does not seem to detour those with an entrepreneurial spirit, as businesses - yes, salons - pop up all of the time.
So, what is it about businesses that cause so many to fail? A recent FastCompany article cites the top reasons for a business to go under as failure to assess the market, build a successful team, create a unique product or service, get the right technology, and finance the business adequately.
Do Your Homework
All other issues aside, let’s address just the financial side of things. When you require funds for your business, it’s crucial to take the time to explore financing options. Educate yourself about types of loans, lending terms, processes, and interest rates, plus watch reviews for red flags with lenders or their business practices.
Consider looking into organizations such as the Small Business Administration to discover what sort of advice or lender contacts they can offer. The Professional Beauty Association is another excellent resource for industry-specific programs and business advice.
Whether business or personal - depending on how your business was set up - you’ll also want to do a deep dive into your credit history to ensure that lenders find you and/or your company a viable investment.
The Credit Game
Whether you apply for credit personally or as a business, those with poor credit tend to pay higher interest rates because they are deemed riskier. That’s why it’s essential to know your credit score and do everything you can to improve it before applying for a loan.
According to most credit bureaus, credit scores are determined by five factors: payment history (35%), credit history (15%), new credit (10%), types of credit (10%), and amount owed (30%). Your credit report will show your credit summary, which is a listing of all the accounts ever connected to you, public record information such as judgments, liens, bankruptcies, etc., and credit inquiries.
FICO is a credit scoring model that most lenders use, with a scale ranging from 300 to 850. A FICO score of 670-739 is considered good, while 740 and above is deemed optimum. Lenders use these credit scores to help predict a consumer’s ability to repay a debt on time.
A business credit score is slightly different; it measures your historical reliability with your financial commitments and tracks your business’s financial history, but it happens on a different scale. Equifax, Experian, and Dun & Bradstreet all measure business credit scores. However, Dun & Bradstreet is the largest agency, and they calculate on a scale from one to a hundred.
A FICO SBSS (Small Business Scoring Service) is another scoring model for businesses, judged on a scale of zero to three hundred. These scores may not be necessary for most business loan applications except for SBA loans.
To look into your credit scores, which will not affect your credit, consider one of the following: If you are applying for credit under your social security number, you can check your personal credit report for free up to once a year at www.annualcreditreport.com. For business credit, apply for a DUNS number with Dun & Bradstreet and open a business credit file with Experian and Equifax.
With a large percentage of salon owners opting to run their businesses as sole proprietors, it’s easy to run into issues by blurring the lines between personal and business credit. In such a case, it may be wise to obtain and use a tax ID number for the business that is not your social security number. That way, you lessen the impact on your personal credit for any credit cards or loans under the business.
If your credit history is not what it should be, look into ways to make it better. A few good rules of thumb include paying your bills on time, not over-extending yourself (or your business), and not having too many lines of credit or credit inquiries, as it could hurt your rating. And for those with minimal credit history, taking a line of credit under the business name and being diligent in making your payments in full and on time is a great place to start. However, be aware that establishing or improving credit does not happen overnight.
The Lending Process
Before applying for a loan, you should first examine your business’ cash flow to make sure you can afford the loan. Next, get your documentation in order: you’ll need your most recent tax returns, business bank statements, and any other documentation the lender may require.
A detailed business plan is also essential to the process. A well-written plan shows lenders that you’ve done your homework, you have a plan for your long-term success, and that your business makes financial sense. Your business plan will help a lender see how you intend to use the funds and how they’ll make their money back.
Once you find a lender, have your paperwork in order and start the application process. Follow your lender’s instructions to submit your application with all of the needed documentation, then wait for the approval process to take its course until you hear back on the status of your loan.
When you secure your funding, make the appropriate ledger entries within your financial records for the loan and set your plan in motion for whatever buildout or expansion you outlined. Track the money carefully to be sure you are spending it wisely. In the meantime, stay true to your loan re-payment plan so your credit rating remains strong and you honor your commitment to the lender.
But, What If?
If you cannot secure a loan through traditional means, look for organizations whose mission is to support small businesses with working capital term loans. You want a lender that is more flexible in their credit criteria, participates in special state programs for small businesses, or offers grants. For example, Accion Opportunity Fund Community Development (AOF) is a non-profit small business lender poised to help entrepreneurs who don’t meet the requirements for traditional financing. Instead, they support businesses to help uplift communities and anchor local economies.
“If you’re looking for a small business loan, AOF can connect you with the ﬁnancing you need,” said AOF’s Adriana Williams. “We look at more than just your credit score to determine business viability and structure loans that work for your business, not someone else’s.”
About the Author: Lori Obiedzinski is a licensed hairdresser and salon management specialist with a background in sales and sales management. She is currently the Director of Client and Partner Relations for Rosy Salon Software.
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