Raising Capital for a Beauty Business: Salon Financing

Raising Capital for a Beauty Business: Salon Financing

Starting your own business is hard, but it’s a worthwhile venture if you’ve always had a specific dream. If you’ve had a successful career in the beauty industry, you might dream of opening your own hair salon or beauty studio. The global beauty salon market is projected to be worth more than $383.8 billion by 2030, so now’s a great time to work on that dream. That said, you’ll likely need salon capital to get started.

Whether you need help acquiring capital, have specific salon equipment financing needs, or just want to understand the best practices of salon financing, this guide can help.

In this article:

• How much does it cost to start a salon
• Considerations for acquiring capital for your salon
• How to get salon capital for your business

How Much Does it Cost to Open a Salon?

Estimates range, but SharpSheets indicates that opening a salon may cost anywhere from $35,500 to $220,000. There are many factors that influence this cost, including:

• Whether you buy an existing salon space or start from scratch. (It’s almost always more cost-effective to buy an existing business.)
• The type of salon and kind of services you’ll offer.
• The salon’s size and location.
• Capital investments, like if you want to finance salon furniture or high-end decor.

SalonBiz suggests that you budget $30,000 to $40,000 each month for operating costs, which include a commercial lease, the cost of hiring beauty professionals, products for hair services, technology costs, and more.

Depending on the services offered, you may also need to invest in styling stations, tanning beds, as well as special equipment and inventory for cosmetic and nail services, waxing and facial supplies, and more.

Considerations for Opening a Salon

Before applying for salon capital, it’s important to create a clear business plan that lays out your vision for the project. Whether you’re an experienced hairstylist who wants to offer haircuts and hair color services, a cosmetologist focused on nail services and skincare, or a masseuse who envisions a salon/spa combo, it’s imperative to think through your business thoroughly before you start. This is one of the biggest challenges for any entrepreneur, but preparation is key when you’re launching a small business.

The key best practice of salon financing is being able to clearly articulate a plan for the money. Before seeking salon capital, consider these things.

Buy vs. build

It’s typically more cost-effective to buy a business rather than start from scratch, but this will vary depending on each individual situation. When you buy an existing salon, a lot of the necessary equipment and inventory is already in place, people in the area are already familiar with the business, and you might even be able to keep the branding if it’s in line with your vision. Rather than start from scratch, you can invest in growing an existing salon business.

When you buy a business, there’s a clearer use for the money, which can make the lender feel better about approving the loan. You might also be able to use inventory or other assets from the acquired business as collateral to secure the loan, so you don’t have to put up personal assets.

That said, if you have a clear vision, there might not be a suitable salon business for sale. Starting from scratch is better for experienced entrepreneurs who know exactly what they want and how to build a business from the ground up.

In either case, you should consider commercial real estate (CRE) loans to buy a property rather than deal with the risks of leases. While lease arrangements can be more affordable, you’ll operate under restrictions from your landlord and always risk a rent hike after the lease expires. If you can afford a down payment in your budget, a CRE loan can put the salon’s biggest asset — its property — in the business’s name.

Types of services

Your funding needs will depend on whether you’re a hair salon, a beauty studio, a nail salon, or a combination thereof. A more comprehensive beauty salon and spa may require salon equipment financing in addition to a lump sum small business loan.

Operating expenses

As noted earlier, SalonBiz estimates the typical salon has operating expenses of $30,000 to $40,000 monthly. If you buy an existing salon, you’ll have a better idea of expenses because you’ll see the books before you buy. That clarity can help inform you how much salon capital you apply for.

When you’re starting out, you may have to account for additional expenses like social media marketing, offering promotions like gift cards, and setting up credit card processors and other technology.

Salon owners should understand both the startup costs and the ongoing expenses that may impact your cash flow in the early going before your business really takes off. While you may be able to go back to a lender for additional salon capital, it’s not a good idea to saddle a new business with multiple loans.

Salon Capital Options

There are several traditional and alternative financing options for aspiring salon owners. Each may have advantages or disadvantages depending on your particular situation.

Traditional Funding Options

Traditional loans include products like term loans, SBA loans, commercial real estate loan, and business lines of credit. They’re available from both traditional lenders like banks or credit unions, as well as online lenders. Different lenders have different eligibility requirements, but they’ll usually require a strong credit score to qualify for the best rates.

Some traditional salon capital options include:

• Term loans: A term loan is a conventional loan product in which a lender gives you an upfront lump sum of cash that must be repaid, plus interest, over a set period of time. Traditional lenders tend to have stricter qualification requirements than online lenders and may be less willing to lend to new businesses without an excellent business plan or high down payment. The better your credit, the better your interest rate is likely to be.
• SBA loans: Backed by the U.S. Small Business Administration, SBA loans partially guarantee loan amounts, protecting lenders from default and incentivizing them to lend to more borrowers. SBA loans often have very competitive interest rates and favorable repayment terms, making them very desirable for small business owners. They also have strict qualification requirements, and may be difficult to get as startup loans. Nonetheless, the popular SBA 7(a) program may be used for a range of business purposes, including purchasing real estate, equipment, or working capital.
• Business lines of credit: A flexible solution for any business, business lines of credit provide you with a maximum available line of credit, only charging interest and fees when you make a withdrawal. Since most lines of credit are revolving, once you repay the amount you withdraw, you’ll have access to the full amount again. This offers flexibility for working capital, cash flow issues, and more.
• Equipment loans: Salon equipment financing can be a great way to purchase the equipment your business needs without putting up collateral. In this arrangement, the equipment itself serves as collateral so if you fail to repay the loan, the lender may repossess the equipment.
• Commercial real estate (CRE) loans: Like equipment loans, CRE loans are tied to a specific asset. In this case, that would be the property you purchased for your salon. While it may be expensive to buy commercial property outright, it gives you more security from a sudden rent hike and greater autonomy in how you use the space.

Alternative Funding Options

In addition to the conventional loan options, there are some additional ways to get salon capital. You may want to explore other options if you have bad credit, little cash to use as a down payment, or are struggling to get approved for a conventional loan. Some options include:

• Inventory financing: If you're purchasing an existing salon, the inventory may serve as collateral to get a startup loan. Inventory financing turns the value of inventory into a lump-sum loan amount. Provided you don’t use that inventory, it remains good collateral, and you make payments on time, it can be a useful way to fund aspects of your business.
• Merchant cash advances (MCAs): A cash advance is like a loan, but it should not be confused with one. In this commercial arrangement, an MCA provider pays a salon owner a cash advance that will be repaid through future debit and credit card sales. MCA repayments may be made daily or weekly as a percentage of sales until the full repayment amount, determined by a factor rate, is fulfilled.
• Revenue-based financing: Currently operating salons can get an infusion of salon capital through revenue-based financing without the burden of fixed monthly payments. In this arrangement, you raise capital by giving investors a percentage of future earnings. Repayment is based on your salon sales so if you have a bad month, you pay less, and vice versa.

How to Get Salon Capital

The process of getting salon capital is fairly similar regardless of the type of financing you’re pursuing. The step-by-step process typically looks like this:

• Determine funding needs: The costs to start or grow a salon may vary widely based on a range of factors, so it’s important to thoroughly assess your needs so you apply for the right amount. Acquiring capital is a lengthy process and you don’t want to have to immediately go back to a lender for more money.
• Check eligibility: Depending on your credit score, business revenue, personal assets, and other factors, you may not qualify for every loan product from every lender. It’s important to be honest about your financial situation to determine what is or is not realistic.
• Compare lenders: Shop and compare lenders online to see what kinds of products and interest rates they offer. Check customer reviews and testimonials and don’t be afraid to call lenders to speak with a person about their products or pre-approval processes.
• Gather documentation: To apply for any type of salon financing, you’ll likely need personal and business information, financial statements, tax returns, and your business plan at a minimum.
• Apply: When you’re ready, it’s time to apply for salon capital. Depending on the product, the underwriting and approval process may take anywhere from a few business days to a couple of months.

Final Thoughts

Starting a beauty salon or spa is a dream for many beauty professionals. It’s very likely that you’ll need salon capital to get started, even if you’re buying an existing business. Finding a lender or financier that you trust is absolutely crucial because you never know when you might need to go back for additional funding to fuel growth or cover emergency expenses.

By acquiring capital, you can get your salon off the ground and secure the salon capital necessary to grow your business into a thriving staple of the community.

FAQs on salon capital

What are some popular financing options for a new beauty salon and spa?

There are both traditional and alternative options for salon capital. Some of the most common traditional options include term loans, SBA loans, and business lines of credit, while alternative options include merchant cash advances (MCAs) and revenue-based financing.

How can I improve my chances of getting approved for a loan?

Lenders pay close attention to your credit history, so the best way to improve your chances of getting approved for a loan is to increase your creditworthiness. Before applying, take some time to pay down debts, make on-time credit card payments, and work to improve your score.

Another good step is to create a very thorough business plan that explains what your salon plans to offer, who you expect to serve, and how you plan to use the money to grow your business.

How much does it cost to start a salon?

There are many factors that influence the startup and operating costs for a salon. The website SharpSheets estimates that the cost of opening a salon ranges between $35,500 to $220,000.

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