Industry • Best Practice
Apr.12,2021By Boulevard Staff
Unfortunately, most businesses fail — up to 70% over the course of 10 years — and one common reason is they are unable to to secure financing that helps them grow sustainably. Acquiring capital is one of the most challenging barriers for owners to overcome, but salon financing options can help you expand your business while maintaining daily operations.
This article will explore the financing options available to salons, along with best practices to maximize their impact.
Salon financing typically boils down to two options:
Debt capital funding: Any financing that comes from loans is debt capital funding. It can come from any source, whether a bank or an individual. This option lets you maintain full ownership of the salon, but you must repay the loan within a specific time frame.
Equity capital funding: Equity financing splits your company’s ownership into shares that you can sell to investors. Salon owners do not have to repay equity capital, but they will no longer have full ownership of the business. If your salon is successful, these stakeholders are entitled to a share of profits. Your investors may also have a say in how the salon is managed, depending on the shareholder agreement.
Before you dive into financing, it’s helpful to understand precisely what type of funding your salon requires. When businesses acquire capital, they don’t just collect a pile of money — they typically dedicate it to a specific purpose within the organization. This detail is vital because financing sources usually target specific capital categories. For example, if you try to get a small business loan from a bank, you must clarify whether the money is to start a company or expand the scope of an existing company.
Salons typically use one of the following capital types:
Seed capital: This financing option is for business development and research. Salons use these funds to create detailed business plans, design marketing campaigns, and other initial tasks.
Startup capital: Many investors use this category interchangeably with seed capital, but startup focuses more specifically on business operations. Startup capital is for equipment, staffing, rental fees, product inventory, insurance, and more. In an ideal business plan, startup capital fully covers all operations for the first 12 to 18 months. And don’t forget — that includes your paycheck!
Expansion capital: Once your salon reaches a certain level of success, it may need additional funds to grow. Expansion capital is for opening new locations, acquiring equipment, launching a service, or anything that helps a business grow.
Of course, the essential part of financing is actually obtaining your capital. The good news is business owners have no shortage of options to choose from, although each comes with benefits and drawbacks.
Owners should never overlook personal savings or existing revenue as a source of capital. If your established salon already earns profits, saving up for an expansion is perfectly reasonable. On the other hand, if you run a sole proprietorship and can keep costs low, it’s possible to set aside seed and startup funds.
Just remember that drawing from personal savings doesn’t mean all capital must come from these sources. Even having a portion of your funding preallocated takes the risk off of lenders and investors — making it far more likely they will consider helping you.
If you are a sole owner, sometimes the most straightforward choice is a traditional loan. Most businesses use this option for financing, but they tend to be highly regimented — banks have very specific guidelines for repayment and major consequences for failing to keep up.
If most of your capital already comes from savings, consider a traditional line of credit for businesses. The terms for usage and repayment tend to be more flexible, and owners can draw on these funds when necessary instead of obtaining a lump sum in advance.
Depending on your enterprise’s size, you may qualify as a small business and gain certain financing benefits. For example, the Small Business Association can guarantee low-interest loans to qualifying salons from partner banks. Alternatively, microloan programs can provide a small capital injection that meets specific needs and is relatively easier to repay.
Compared to other financing options, loans from friends or family members may feel like the safest option — you can usually be flexible with interest and repayment terms. In practice, however, they can put an immense strain on personal relationships. As a salon owner, try to keep the arrangement professional by setting clear expectations for repayment in writing.
Finally, salons may turn to private equity options to secure capital for ownership shares. In most cases, these come from financial capital firms actively seeking high-return businesses and initiatives. When considering firms, the best option is usually to apply with organizations that support local industry. Alternatively, if you have an innovative idea for your salon — perhaps an invention or unique technique — you may get the attention of a more prominent firm.
The main drawback of capital firms, outside of losing ownership, is how long it takes to secure an appointment. Even a successful application takes months to arrange, requiring multiple meetings, presentations, and negotiations. Capital firms are overwhelmed with requests from potential businesses, so prepare for a long wait unless you have a personal connection with an investor.
Alternatively, owners can benefit from solo or “angel” investors they work with one-on-one. Meeting these rare individuals may require some hustle, usually in the form of networking or a professional connection who arranges warm introductions. If you can strike a friendly relationship with an angel investor, you might resolve all your capital worries with a single meeting.
Whether you’re seeking private equity options or small business loans, salon owners must always keep the following best practices in mind:
Have a business plan: Most investors won’t back your salon because you style hair like nobody’s business. Banks and equity firms want to know you’re a professional who will generate returns with minimal risk. The easiest way to communicate that intention is with a business plan that shows how you manage finances and reach a target audience.
Practice your pitch: Can you convince someone how your business will succeed in a few short minutes? This isn’t a theoretical question — you may suddenly find yourself in an equity firm meeting or shaking hands with private investors. In these cases, you need to communicate your salon’s value and how it will grow with their support. Create a brief but engaging slideshow or pitch deck for formal meetings, but be sure to practice your elevator pitch in advance.
Be prepared to wait: In most cases, salon financing won’t happen overnight. Startups will need to generate savings, while established businesses will need to prove their value to potential investors. Be prepared to sustain your business at a lower level before you get your big break.