Almost every business goes through ebbs and flows in demand. Salon owners especially know that wedding season is prime time for their business, and that things might slow down in the winter. These dips in demand can make balancing your cash flow difficult.
Cash flow issues—trouble weighing the money that comes into your business with the money you send out—can be fatal for a small business. One study showed that it was the number one reason why small businesses fail.
That means business might be booming, but if you can’t cover for sudden expenses, low seasons, or emergencies, you might find yourself unable to keep the doors open.
This is where responsible business financing comes in. Small business loans are best used by successful businesses as a springboard to greater success—using an SBA loan to expand to a new location, for example. But there are times when the right loan, line of credit, or other forms of financing can keep your business afloat, helping you survive while you even out your cash flow and right the ship.
When applying for financing, there are a few factors you’ll want to keep in mind, which may help you find financing at the best possible rates and lower your costs in the long run:
Your business credit score: Your business credit score is similar to a personal FICO score—a number that tells lenders how creditworthy your business is and how likely you are to pay them back.
Time in business: Established businesses receive better rates than startups and new businesses (under two years of operation).
How quickly do you need capital, and how often?: Do you often find yourself short at the end of the month, or did an unexpected emergency create a rare cash flow need?
How quickly can you repay your financing?: Different financing options have varying repayment term lengths. Merchant cash advances take a bit out of your business every day, while lines of credit and term loans might ask you to repay each week or month for years.
Here a few different financing products to explore for when your salon experiences cash flow problems:
Business Lines of Credit
One of the most sought-after financing products on the market thanks to its flexibility, business lines of credit are similar to credit cards: A lender extends you a pool of money, and you can draw from it as needed, only paying off what you draw.
Unlike credit cards, however, some business lines of credit can give salon owners access to millions of dollars, to cover all kinds of costs. If a natural disaster strikes your location and you need emergency funds to get your salon up and running again quickly, a business line of credit is the perfect financial tool. (According to FEMA, 90% of smaller businesses fail within a year unless they resume operations within five days.)
You can use business LOCs for a wide variety of purposes as well, from covering payroll to buying inventory. The money you take from your pool is deposited as cash in your bank account to use as needed.
Salon owners can apply for a LOC and keep it in their back pocket until that need arises. That way, you aren’t taking out a loan for a need you don’t know exists yet.
Much of the equipment in a salon requires a serious investment, from styling stations to hair dryers to tanning beds. If a piece of equipment breaks, or you want to upgrade to keep up with the trends of the industry, you’ll have to sink a ton of your capital into that purchase—opening you up to disaster if an unexpected expense arises soon after.
The answer to this dilemma: equipment financing. This is a loan extended to cover the cost of a specific piece of equipment.
In this scenario, the lender—it could be a bank, an online lender, or the seller of the equipment—gives the borrower the exact amount of money to buy the equipment, which the borrower will pay off in installments.
Equipment financing loans are “self-secured,” meaning the equipment itself acts as collateral for the loan. If the salon owner fails to make payments on the equipment, the lender can simply seize the equipment. This makes equipment financing a low-risk option for salon owners, who can recoup some of the expense by selling the equipment again at the end of the term if they so choose.
Using equipment financing, salon owners can spread the cost of expensive equipment over months or years, keeping their finances liquid.
A new class of online lenders has emerged in recent years to disrupt the small business lending industry, and their short-term loan products—while almost certainly more expensive than a typical bank term loan—can also work as short-term cash flow coverage.
Speed is one of the main benefits of taking out a loan from an online lender. Some lenders can extend borrowers a substantial short-term loan in as little as a few business days. Bank loans, on the other hand, have underwriting periods that lasts months.
If you’re in a pinch and need to get your hands on a large chunk of financing quickly, a short-term loan is a good option. This is especially true if you are using the loan to cover the cost of a major opportunity—such as a deal on inventory—without sacrificing your ability to make payroll or pay your bills.
Business Credit Cards
You may not think of a credit card as a form of business financing, but putting a purchase on your credit card is much like taking out a very short-term loan to pay for it. If you can pay off that expense before your next payment period—and thus avoid interest—it’s even better.
In a pinch, business credit cards can cover your cash flow gaps, such as purchasing inventory, or even financing larger purchases such as equipment. You’ll gain extra perks for your business for doing so, including racking up reward points, purchase protections, and (assuming you pay your bill each month) a boost to your business credit score.
Some salon owners may qualify for business credit cards with a 0% APR for the life of their introductory period. For some cards, that period can last longer than a year. That means you’ll have access to what is essentially an interest-free loan over that period.
For the most part, a successful small business will conduct regular cash flow analysis to avoid gaps that might result in defaulting on payments or missing payroll. That being said, there is always the possibility of unexpected expenses that throw a wrench into the best-laid plans. Get your hands on some flexible, or low-risk, or speedy financing options like the ones above and you’ll have more options at your disposal for getting your cash flow back on track.
About the Author: Meredith Wood is the Editor in Chief and VP of Marketing at Fundera, an online marketplace
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.