How to Finance a Salon

Those who work in or own their salons know the power of providing beauty and health services to their customers. Few businesses help their customers go through such a positive transformation so quickly and become such integral parts of their clients’ lives.

Similar to any small business, as a salon owner you may find yourself in need of a little extra capital to scale and grow your company in order to continue providing those services. Whether you need to purchase extra inventory or you want to put money into a marketing plan, the right business loan can be a great way to finance your growth.

Before you decide to take on any extra funding, it’s essential you take time to calculate the true cost of every loan and feel confident in your investment. If you think financing may be right for you, here’s where to start.

Create your business plan

Whether you own a salon and you’re looking to make bring on new stylists or expand your business to a second location, or you’re just starting out, you need a business plan that reflects your expected upfront and operating costs. If you’ve owned your company for a while, you probably already have a business plan, but the right plan is constantly evolving and you should revisit it often.

Ask yourself: Do you plan to have stylists rent their chairs, or work as salaried employees? What services will you offer? How many locations do you want to operate? 

Without an understanding of how much you’ll expect to spend—not just as a salon, but as a salon in your specific area, with the staff you want to hire, using the equipment you expect to either purchase or lease—you won’t know what kind of capital you’ll need.

Understand the barriers to salon financing

What makes salons somewhat unique among other small businesses is their inherent cyclical nature. Plenty of businesses see an uptick during the holidays and a slow January, but salons can have slow days of the week, summer lulls, and other bust-times that lead to cash flow issues.

Salons are also highly dependent on their equipment and their space. Imagine your sinks back up and you can’t use them for a day—your stylists won’t be able to do their jobs. These risks can make lenders wary to lend to you.

But on the other hand, a recent study in Salon Today predicts a boost in growth as consumer confidence swells—with family-economy salons, in particular, showing robust sales. There’s an obvious opportunity for success in the salon industry, you just may have to convince a lender that your salon or spa is thriving.

To give yourself the best chance at landing financing, pay close attention to your sales and bank deposits. Consistency is always a plus—increasing your revenue month-over-month looks even better. If you know that you’re about to hit a slow season, it’s best to seize financing at the peak of your sales. Find the best financing option for you

Though a salon can be a considered a “high risk” industry, that doesn’t mean your options are limited. It just means you need to know the best way to approach your financing needs and where to look. Here are some popular options:

Traditional bank loans

Securing a term loan (or line of credit) from your bank will likely provide the cheapest source of capital for your business. Traditional banks often offer low rates and generous terms. If you qualify for a bank loan, you can use it for rent, inventory, training, equipment, and any other investment in your salon business.

There are two prominent downsides: The underwriting process for a bank loan can be lengthy, and approval rates are low. For some salon owners who need working capital now, a long wait may be a non-starter. However, if your financials are in good shape and you have some time to wait, a bank loan will likely be your cheapest option.

SBA loans

The Small Business Administration administers loans by agreeing to partially back loans from traditional lenders, making them more likely to extend financing to riskier ventures. Because of their agreeable terms and lower interest rates, many consider an SBA loan the holy grail of small business loans. Plus, even if you have been turned down for a traditional term loan, you can still apply for SBA backing.

Your finances still need to be in good shape if you want to be approved for an SBA loan (typical approved customers have a credit score in the high 600s, over $180,000 in annual revenue, and have been in business for over four years), and the application process can be very time-consuming. That said, if you qualify for the SBA loan, it’s a good idea to pursue it if it works for your needs.

Some different SBA loan options include:

7(a) loan: A general business financing loan that can be used for working capital, refinancing old debt, or renovations. You can borrow up to $5 million, with repayment terms up to 7 years (for working capital) or 25 years (for commercial real estate loans).

CDC/504 loan: This loan is specific to purchasing major fixed assets, such as equipment and commercial real estate. You can borrow up to $5.5 million to repay over 10-20 years.

Microloans: The SBA microloan program offers smaller loans—up to $50,000—for startups or newer small businesses, with repayment terms up to six years.

In addition to these larger categories, there are financing programs specific to women, minorities, veterans, those in rural areas, and other populations who are often denied access to capital. Some of these loans are dispersed through the microloan of 7(a) programs, while others come from different programs altogether, such as SBA 8(a).

Alternative lenders

Alternative lenders have become a viable route for many entrepreneurs, thanks to their quick underwriting processes and the variety of financing options they offer. These online lenders offer a variety of products and can be a quicker way to get funds you need for your salon.

Depending on the lender, some can turn around your application in as little as a day and get you funding in less than a week. The terms of your loan will depend on your financial situation and it’s important to be sure you understand your payment options and be confident you can afford them. Due to the multitude of online lenders, you’ll want to take careful consideration when comparing variables like APR and factor rate.

Business credit cards

If you don’t already have one, a business credit card is a must-have tool for nearly every business owner. If you need access to quick capital, a business credit card could be a valuable option. Some offer a 0% intro APR period that acts as an interest-free loan, as long as you’re careful to pay your balance in full before the end of the promotional period.

Also, depending on the bank, business credit cards offer perks like extra points on social media advertising spends, customizable cash back categories, and of course the bonus of wisely separating your business and personal expenses.

When launching your salon, a business credit card can be used for smaller expenses, such as inventory or recurring charges like marketing or social spend. Be sure to spend responsibly and only buy what you know you can pay back.

Business line of credit

A business line of credit is similar in some ways to a business credit card: You are given a specific amount of financing that you can draw on, repay, and draw on again as needed. This “revolving” credit doesn’t need to be approved for new financing every time you pay it back, as you do with loans.

For many salon owners, a business line of credit helps even cash flow during slow periods and act as an insurance policy for unforeseen expenses.

The downsides to lines of credit are that there are typically upfront fees and the overall borrowing cap is often lower than a traditional term loan. If you need a big windfall for a large purchase, a business line of credit may not be enough.

Equipment financing

This form of financing is particularly powerful for salon owners who need to invest in things like styling stations, tanning beds, and other expensive pieces of equipment. Your purchase acts as collateral so you don’t need to put up additional funds to secure the loan and you can spread the cost of a large purchase over a longer period of time.

What you qualify for depends on your financial situation and what kind of equipment you need, though most equipment financing has fixed interest rates and set term lengths to keep your payments consistent. You can expect equipment financing to come with higher rates than traditional loans, but it can be a great way to build out your salon when you need to.  

What about leasing?

Leasing your equipment is also a viable option, especially for startup salons that don’t want to tie up too much capital in major investments.

There are some clear benefits to leasing your equipment: You won’t need to dish out extra money upfront, or pay more per month than you would for a term loan or line of credit.  You can stay current with upgrades to the equipment—opting for a newer edition after your lease is up rather than waiting for your purchases to break. And you’ll maintain cash flexibility in case of emergencies.

But keep in mind: Often, leasing equipment is more expensive in the long-run than buying something outright, but you’ll have the option to buy whatever you’re renting at the end of the lease for fair market value. Be sure to calculate the true costs of leasing vs. buying before you sign on the dotted line.

Starting or expanding a salon is an exciting but challenging adventure, whether or not you choose to obtain financing to help you make the numbers work. Though you should only borrow when absolutely needed, obtaining the right type of financing can help your salon grow and scale when the time comes.

About the Author: Meredith Wood is the Editor-in-Chief and VP of Marketing at Fundera, an online marketplace for small business financial solutions such as business loans. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.

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