Funding Options for Your Salon or Spa

Businesses in all industries and sizes need additional financing from time to time. With technology growing as quickly as it has, there’s a much wider variety of funding options for your salon or spa to choose from.

With a working capital loan, you can grow your salon sooner than you imagined. Here, we’ll cover how you can use additional capital for your salon and break down two popular funding options.

What Are Working Capital Loans?

Working capital loans are specialized loans designed to help businesses meet their needs. Unlike traditional financing, you don’t need to include a reason why you need the loan.

Working capital loans come in various forms:

• Lines of credit
• Short-term loans
• Peer-to-peer (P2P) loans
• Equipment loans
• Merchant cash advances

We’ll break down two options (lines of credit and P2P loans) to consider for your salon. But first, we’ll cover how you can use these funds for your business.

How to Use Funds to Grow Your Salon

With the right plan in place, you’ll be more likely to make the most of your funding. Before you begin applying for funding, make sure you know exactly why you want to use them and how you’ll use them to get the best return on investment. Here are four ways you can use capital to grow your salon.

• Hire more talent.

If you’re ready to bring on more stylists, colorists and more, additional funds can help. Hiring great talent is a long-term investment and hiring the wrong people can cost your business 30 percent of its yearly earnings. With additional funds, you can invest in the right job boards (and boost your job listings) and make sure you can cover payroll for the more seasoned applicants.

• Expand your salon.

Is your salon ready to add a manicurist or aesthetician? Are you looking to provide more hair product options? Or maybe you’re ready to purchase a larger space to bring on more clientele? Expansion can come in many ways: from offering more services or products to opening a larger location to upgrading your online website. Most small businesses are hoping to take on larger opportunities for their businesses – in fact, 59 percent apply for funding for this very reason. With additional funds, you can expand your salon sooner and better than you had hoped.

• Stock up on your inventory.

This is one of the most common use cases for additional funds. Your salon needs to keep up with inventory in order to stay open. What happens if you run out a popular dye or shampoo/conditioner? With additional funds, you can quickly respond to consumer demand, prepare for your busy season and even set yourself apart from the competition.

• Expand your marketing efforts.

Every business needs a marketing strategy. After all, you may offer great services and products, but no one will know about it if you don’t tell them. You can strategize in-house with a marketing manager, or you can outsource to a contractor or agency. Additional capital can help with both cases. You should also consider investing in a high-quality camera or photographer/videographer for your social channels. You want people to see the before/after of certain looks. One popular idea is showing a time lapse of someone dying their hair to a vibrant color (for example, from dark brown to bright pink). These can see a lot of engagement!

Lines of Credit

Lines of credit are great options for small business owners. Business lines of credit are designed to help meet short-term cash needs, like covering payroll, managing cash flow, stocking up on inventory and any other operational costs.

With a line of credit, you get a fixed amount of credit extended by an online lender. You can borrow within that limit, and you only pay back what you borrow. For example, let’s say you’re approved for a line of credit up to $250,000, and you borrow $100,000 of that. You only make payments on that $100,000.

Lines of credit come in four types:

• Revolving vs. non-revolving

With a revolving line of credit, you can borrow money multiple times, as long as you’re within your limit. Let’s use the example from earlier. Once you pull $100,000, your limit goes down to $150,000. As you make payments, your limit goes back up (similarly to a credit card). Each withdrawal also has the same loan terms, considered to be one loan.

With a non-revolving line of credit, your funds may or may not replenish once you make payments. If your funds don’t replenish at all, you can be certain your line is non-revolving. However, be careful. Some non-revolving lines of credit can include replenished lines, but each withdrawal may act as an independent loan with different terms. In that case, your line is non-revolving, even though it may look like a revolving line.

• Secured vs. unsecured

Secured lines of credit are riskier for you. With a secured loan, you’ve put some sort of collateral to qualify for funding. These lines tend to offer lower interest rates, better terms and larger lines. But if you default on the loan, you lose the assets you’ve put up for collateral.

Unsecured lines of credit are riskier for the lender because they assume more risk if a loan is defaulted on. Because of this, some may come with additional costs, come in shorter terms and have higher interest rates.

Business lines of credit can come mix and matched based on the lender:

• Secured revolving
• Unsecured revolving
• Secured non-revolving
• Unsecured non-revolving

How to apply for a line of credit

Most lines of credit are offered through online lenders, which makes the application process much quicker and easier. Here are five important steps you need to take when applying for a line of credit online.

• Find the right lender.

Finding the right lender is extremely important. You want to find the best fit for your business. Choosing the right line of credit lender can depend on some important aspects:

• How soon you need funds
• How much you need
• Your credit score
• Your overall business health

Traditional lending can take weeks or even months to process. However, most online lenders can get you a decision within minutes, and funds can go into your account within a day. In most cases, online lenders need to see a business that’s at least a year old and has a certain revenue threshold.

• Gather what you need.

Before you begin applying to multiple lenders all at once, make sure you have what you need for each application. Some lenders may want to see a business plan or connect online accounts (including PayPal, eBay, Amazon, social media channels, Intuit QuickBooks and more). Application can be quick, and in some cases, the more accounts you connect, the better picture they get of the health of your salon. If your salon doesn’t have much credit history, but it’s seeing a good amount of sales or even social presence, you may be able to get a better line and better terms.

• Compare each loan terms.

Once you’ve done your research and narrowed down the candidates, compare the loan terms before you accept the offer. Look at the interest and fees to see just how much you’d be paying back. Keep an eye out for origination fees, early payment fees or late payment fees. Determine the total cost of the loan based on the term length (how long it will cost you for a 6/12/18-month loan). Finally, compare these numbers among the others.

• Be honest with yourself.

This is probably the most important step. Yes, you need funding, but before you sign the loan, make sure you can handle the responsibility. Look at the repayment schedule and the monthly amount, and make sure it’s not too much of a burden on your business. It’s better to grow slowly than rush when you aren’t ready.

• Accept the line.

Once you’ve completed your research and found the best fit for your business, accept the loan and start growing your salon. With a plan in place, you’ll be able to use your funds wisely to help sustain growth while maintaining in control and within budget.

Advantages vs disadvantages for a line of credit

Like any type of funding, lines of credit come with their own pros and cons. Here, we’ll break down three advantages and three disadvantages to consider when looking for lines of credit.

• There’s no collateral required…

Lines of credit usually come with less risk to you. Most online lenders won’t require you to put up collateral for the loan.

…but they come with higher interest rates.

However, this means that the interest rates are higher because the lender secures most of the risk. This means your business will pay more over the life of the loan.

• You can use the funds however you want…

Lines of credit offer very few restrictions on how you use your funds. Of course, you should not use them for personal needs. But whatever you need to help your business, your funds are there to help.

…but you need to consider repayment.

Like we mentioned earlier, it’s extremely important to ensure you’re able to make payments each month. If you know you’re going to miss a payment, ask your lender if you could have an extension – but don’t do this too often. You could damage your credit.

• They help with short-term needs…

Lines of credit are designed to help cover operational costs, unexpected costs or any short-term business needs.

…but shorter-term loans mean higher monthly payments.

However, shorter term lengths often mean you pay more each month. They’re also not intended for longer-term business goals.

Peer-to-Peer Loans

Peer-to-peer (P2P) loans remove the middleman from the loan process. When you apply for a P2P loan, you’re borrowing directly from another person or business (or multiple people/businesses).

These types of loans benefit both the lenders and the borrows because they create steady incomes for lenders through interest payments while also not having as strict of requirements for borrowers (very high credit, time in business, etc.).

How to apply for a peer-to-peer loan

It’s important to remember that P2P loans are still loans. Some borrowers may assume that since the loan isn’t from a lender or bank, it’s not technically a loan, and therefore fees may not apply to help (and they may think they can default without penalty). However, that’s not the case. Here are three important things to remember when applying for a peer-to-peer loan.

• Check if P2P loans are available.

The first thing you should do is make sure peer-to-peer loans are available where you live. All lenders are regulated at both the federal and state level, and not every state allows platforms. A good example of this is Iowa. P2P platforms like Lending Club and Prosper aren’t available for business owners in these states.

• Find the right platform.

Each platform comes with a different lending criterion. Some may want a minimum annual revenue or time in business. The APR rates also vary from site-to-site as well as the loan amount you can receive. Depending on the platform, you can receive anywhere from $2,000 to $500,000 in loans. Here are some examples:

• StreetShares: access between $2,000 and $150,000, APR between 9 and 40 percent, annual revenue of $75,000 and minimum of one year in business

• Funding Circle: access between $25,000 and $500,000, APR between 7.4 and 36%, no minimum annual revenue and minimum of two years in business

• Lending Club: access between $5,000 and $300,000, APR between 9.8 and 35.7%, minimum annual revenue of $50,000 and minimum of one year in business

Conduct your own research and make sure you keep an eye out for these aspects to find the best fit for your salon.

• Watch out for fees.

All loans have costs more than just interest rates. Unfortunately, many business owners have been fooled by being offer low-interest rates but then being slammed with high loan fees. Peer-to-peer loans often have higher fees to support platform development and infrastructure.

Advantages vs disadvantages for a P2P loan

Just like lines of credit, peer-to-peer loans come with their own benefits and costs. Here’s a breakdown of three of each to keep in mind.

• P2P loans look beyond credit scores…

While a higher credit score can help, the process looks past them. You can explain why you need the loan, which can appeal to them more than someone without a defined plan.

…but investors are careful.

With peer-to-peer loans, investors take on more of the risk. After all, they’re investing in your business without being guaranteed they’ll see a good return on it.

• Borrowers have a choice of loans…

You’re not required to take out any loan you’re offered. If the loans you’re offered don’t work for you, you can pass on them. This is known as the auction process.

…but approval and funding times can vary.

However, because you’re being matched, the process takes longer. It could take a few minutes to a few days to even a few weeks before you get an offer.

• You’ll be matched with an investor…

With P2P loans, you don’t submit an application. Instead, you fill out your business profile, which investors review. If they like what they see, they’ll offer you funding.

…but the application process may take longer.

While creating a business profile is quicker than applying for a traditional loan, they often take longer than applying for funding from online lenders.

If you’re looking to grow your salon, whether it be expanding more services, hiring new talent or opening a second location, consider these financing options. Sometimes, business owners may think taking on loans is a sign of misstep. However, that’s not true. With additional capital, small business owners can take their businesses to the next level much quicker than they had imagined.

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Constantina is a content specialist at Kabbage, a fully-automated online lender for small businesses. She holds a Master’s degree from Northwestern University and has been featured in Huffington Post and Advertising Weekly.