How to get funding for your hair and beauty salon business.
Get Funded: Top Bankable Ways to Get Funding For Your Hair and Beauty Salon Business
One of the major concerns for a potential business owner is funding. You have to worry about how you will come up with the capital required to get all the things that you need, and you also have to worry about sustaining the business with your money before the profits start to roll in. The beauty salon business is no exception to all of this, and a lot of prospective beauty salon business owners have been discouraged from starting the business because they couldn’t figure out a way to get the funds needed to get their business moving.
The purpose of this guide is to provide some insight into all of this. The information provided forthwith should give you a better understanding of the most reliable ways to get funding for your beauty salon business. We will discuss the sort of financing that you need, the different ways you could get that financing and the importance of having a business plan involved.
First of all, you need funding for the pre-operation matters. You need money to set up a shop, and the cost of this would depend on the size of the shop and its location. If you already have a house located in a suitable location, you may use it depending on the rules and regulations of your city, but if you don’t, then you’d have to rent or lease a space. When renting this space, you need to make sure that it is in a location where you would enjoy good patronage.
You will also need capital for your salon supplies, equipment, furnishings and interior decorations. Professional fees also need to be taken care of from the start, so you must plan to pay for legal fees and accounting fees.
There are different departments to which all of this initial funding will go. But first of all, you need to think about the type of financing that you believe is most suitable for your needs. There are different types of capital, and each type should ideally be applied to varying points of starting up your business.
The different types of capital funding are:
Seed Capital: you use this money for initial research and planning
Start-up Capital: also known as “working capital.” You use this money to rent your location, buy your equipment and supplies, and put in all the fittings necessary to make it look like a proper beauty salon. All of this should be taken care of within the first year of the business.
Expansion Capital: also known as “Mezzanine” capital, this is funding used to grow your business to newer levels after achieving a certain amount of success at one level. This may include buying more equipment, adding a spa section if you see the need, and creating new spaces in the salon where you can employ other stylists to help attend to your increasing number of customers.
Bridge Capital: as the name suggests, bridge capital is the money that you use to bridge the space between your current level of financing and the next.
At various stages, each one of these areas will have some measure of impact on the growth of your beauty salon business. Most prospective beauty salon business owners will be focused on obtaining capital, so this is the area that we will pay the most attention to.
When you get the most basic needs out of the way, you will still need funding to maintain the business for the period that it takes to mature and begin to sustain itself – it is sort of the same approach with raising a baby if you want a practical example. So, what are the things that you may need to spend money on while the business “cuts its teeth,” so to speak?
- Staff payments (because you’ll definitely need an extra hand or two)
- Light, water and other utility bills
- Maintenance of your dryers, sanitation tools and other equipment
First of all, make sure that you have enough money to pay yourself. You don’t want to be running low on cash to the point where you can’t take care of your own needs. Then, make sure that you have enough funds left to sustain the business. The first year of operation will be very crucial to the overall success of your business, so it is vital that you have the funds to get through it.
A lot of small businesses fail within the first year, and while poor management is a reason for some of these failures, a large number of them were down to a lack of proper financial planning. Make sure that you have enough to deal with any expected and unexpected problems that may rise up along the way, so you don’t have to give up on the dream of owning a hair and beauty salon business before it has really taken off.
Plan for things such as paying your staff, restocking supplies, routine maintenance of equipment, and payment of utility bills; basically, ensure that you have more than it appears that you need to be sure that you’re prepared for the unexpected.
Now that you have information about the different kinds of funding that you need at different stages of your business, how exactly do you go about financing it? For capital finding, you can choose one of these two options: Debt Capital and Equity Capital.
Debt capital funding requires you to pay back the loan that you’re granted over a specific period. The payment will include added interest and possibly some other additional fees. When you’re granted a debt capital fund, you retain full rights to the ownership of your business, but you have a legal obligation to pay back the loan as and when due.
Equity Capital works differently. When you present your case to specific people/firms to request for a loan, they may decide to grant it to you on the basis that they will own a part of the business. This means that, if your hair and beauty salon business becomes a massive success, you will not be the only one to reap the rewards. Everyone that provided this equity capital to you will have a stake in the business, depending on pre-agreed terms.
While this may save you the worry of unpaid debts, you need to make an important decision to judge if the capital is worth sacrificing the full ownership of your business for. If you firmly believe that you will be able to pay back the loan, then it is inadvisable that you take such a deal as it may be a massive loss on your part in the long run.
Ask yourself these questions to help you to decide if you’re ready to take a debt capital fund:
- Can you get more money from the lender if the original loan is not enough?
- Can you pay off the debt monthly?
- Would you qualify for debt financing?
- Are you ready to lose your valuables if it turns out that you cannot pay off the debt?
For equity financing, ask yourself these questions:
- Would the investor be genuinely interested in what you have to offer?
- Will you have any issues with sharing consequent profits with the investor?
- Are you okay with submitting your financial information for scrutiny?
- Will you be able to provide all the information that the investor requests for?
If you have asked yourself these questions and are still confused about what to do, or if the options just don’t sound good to you, then there’s good news. You should know that there are alternate considerations that you can make about where to get funding from. Some of these choices include:
- Your personal savings
- A bank loan
- Borrowing from friends and family
- Collaborating with a partner that you trust and using their funds
- Using a commercial finance company
- Venture Capital Financing
You should note that the chances that a bank would offer you a loan larger than the funds you could get from an investor are very slim. If you need a significant amount of money, an investor would still be a more realistic consideration. However, the chances that you will need more money for a beauty salon business than a bank loan can provide are also slim.
Now, we’ll take a brief look at two common options from the list above for clarity.
The amount of money that you’ve got stashed away would determine if this is a real source for all the funding you need to start-up your beauty salon business. If you have enough money, then this is definitely the best option for you.
You don’t have to worry about paying off debts, and you can keep the full ownership of your business with all future profits without involving anyone else. This becomes even more realistic if your business plan is set up in a way which does not require you to hire additional staff or pay too much for fees and licensing.
Traditional bank loans are possibly the most commonly used method for beauty salon financing from outside sources. However, they require that you must be willing to adhere by their strict guidelines of application and re-payment. Failure to do this may lead to the loss of your business in the long run, which would be devastating.
Before applying for a bank loan, you have to consider these things:
- How long should the credit be? (Payment duration)
- What exactly are the things that you need the loan for?
- What can you provide as collateral?
- Are the terms and conditions of the loan feasible for you?
These questions will help you decide if you really want or need to take out the loan. If the answers to the questions are all positive and you are ready to start approaching banks for a loan, these are the things that you must do:
- Have your business plan ready
- Call ahead for an appointment
- Be professional
- Prepare to answer any related questions
- Be confident
- Do not behave in a manner that presents you as desperate for the loan
- Be truthful, straightforward and matter-of-fact
- Dress appropriately
Borrowing from Friends/Family
You may choose the route of getting funding from the people close to you. The major advantage of this approach is that they are more likely to be inclined toward listening to your proposition and putting faith in you. However, you will still need to convince them that the business is going to be a success.
You need to be very transparent about how you plan to pay back the money and the time-frame that they should expect the payment. All you have to do is be convincing enough.
This method works for some people, but there is always the tendency that it can put a strain on your existing relationship with the person that you borrow from. On the flip side, if it all works out, it will strengthen your relationship.
Particularly in dire situations, you may feel forced to give up sole ownership of your business to get funding for it. There may be a potential investor who you can convince – or may just be willing – to invest in your business in return for a partnership.
This means that eventual profits and any future success of the business will be shared between you and your partner, so you need to be absolutely sure about any decision to take this step. If you are convinced that you want to, then you may approach your investor to discuss terms.
Using a Commercial Finance Company
Commercial finance is mostly offered by banks; although there are other finance companies that offer them (such as the Small Business Administration called the SBA). The major difference between this and a regular bank loan is that some of these commercial finance companies already have existing loan offers to small businesses that you only have to take advantage of.
Usually, you secure the loan with business assets such as receivables from invoices, real estate, equipment or supplies. In a case where the loan is unsecured, the lender will basically be pinning their hopes on the cash flow generated by your business for repayment.
Venture Capital Financing
Obtaining venture capital funds is possibly the most complicated option on this list. The way VC funding works, investors put their funds into a VC firm that helps them to invest these funds into high-risk, high-return businesses (which are startups a lot of the time).
As a beauty salon business owner, applying for this type of funding will require that you do a lot of research about the VC firms offering opportunities to your type of business. When you have this information, you need to prepare a pitch that you will present to the firm of your choice as an application. Typically, it is expected that this pitch will include your business plan.
Additionally, you must be prepared for the fact that it may be very hard to land a meeting with the principal of the VC firm, and the whole process could last for several weeks. The process looks something like this:
- Setting up a meeting with the principal of the VC firm
- Follow-up meetings and conversations (lasting for weeks)
- Presentation of your pitch to all the partners of the VC fund that you are applying for
- Issuance and negotiation of a term sheet
- Drafting and negotiation of legal documents serving as evidence of the investment by lawyers on both sides.
Before your application, you need to familiarize yourself with the term sheet and other documents involved in the process of obtaining the investment.
Why You Need a Business Plan
All of the methods by which you can acquire funding will require that you have a business plan in place. For instance, if you were going to take a loan from the bank, the bank would need to see the layout of your business plan. They need this information to be able to decipher for themselves if your idea for a business is solid and feasible enough to guarantee that you will be able to pay back the money that you are loaning from them.
Make no mistake, the bank does not necessarily care about your business, they only care about getting their money back for you and you need a business plan to be able to prove that you will deliver. This applies to any other financial institutions that you may want to take a loan from too.
In the same vein, if you are planning to borrow the money that you need from your friends or family, or to look for a partner that can bear the financial burden of funding the business in exchange for a shared ownership of it, you would also need a business plan.
Anybody that is going to invest their hard-earned money into something will need quite a bit of convincing, and there is no better way to show seriousness, professionalism and organization than presenting your business plan to them.by doing this, you are literally showing them what they are investing in, and if your business plan is well-written, they should be easily convinced and re-assured.
You may think that writing a business plan is something that you can easily learn by yourself and take care of. However, writing an effective one is not something that can be learned on a whim. It is an extremely technical job and a lot of research and time is put into it – even by professionals.
There are a lot of reasons why purchasing a business plan template is a lot more reasonable than trying to write one or hiring a business plan writer. Some of the major reasons include Cost (of hiring a writer), Time (spent on research for writing by yourself), Format and Language.
This refers to running costs of hiring a business plan writer to do the job for you. Business plan writers charge a ton of money – running into thousands of dollars most of the time – and if you’re just starting out your business, this is really not the most financially scrupulous decision. You could be setting yourself back by a lot of money before you’ve even given your business the chance to grow into something substantial enough to draw profit.
This refers to any decision you make involving writing out the business plan by yourself. As we suggested already, business plan writing is an art that cannot be learned effectively within any short period of time. It is extremely serious and tedious business, and this is why business plan writers charge tons of money for it. Now imagine an amateur trying to get the job done for yourself.
The amount of time that you would spend writing your business plan is a luxury that you cannot afford. It will simply take too much time than is worth it to write a business plan by yourself, considering all the learning and research that you have to do, and it really would be a lot more efficient to work with a template that is guaranteed to achieve the same purpose rather than take a risk that may not turn out with a positive result.
Approaches to writing business plans for specific businesses change over time, so there is the need to be constantly aware of the formats that are currently in place. This is information that may not be readily available if you try to research by yourself.
Every business has its “lingo,” and while this may seem inconsequential on a surface level, it shows how much a person knows about what they are working on. If you attempt to force the process and write a business plan by yourself, it is doubtful that you will be familiar with the sort of language that is expected of professionals in the art and anybody that looks through your plan may be able to sniff out the difference from a mile away.
Needless to say, this would not look good for you in situations where you’re trying to present your business plan to possibly get a loan from the bank or get funding from an investor. If they have any reason to believe that you are not well immersed in the business that you are trying to pitch to them, they may be unwilling to part with the funds that you need to get your business off the ground or to help it grow.
If you go on the Internet, there are a large number of companies that offer business sample templates for sale, and it may be hard to filter through them to find the quality options suitable for your beauty salon business. As a specialized business plan writing guide, Black Box Business Plans offers the most comprehensive and effective business plan templates.
Hopefully, this guide has been able to shed enough light into the introductory aspects of getting funds for your beauty salon business. All that is left for you to do is consider the advice given and follow prescribed steps where necessary. Do not forget that whatever you do, you absolutely need to have a business plan as the first step in your beauty salon venture. Best of luck!
To learn more about our comprehensive beauty salon business plan template click here.