Before the ribbon cutting, before the first appointment is booked, and before the lights get turned on, you’ve got to find the financial muscle to make this dream come true.
Opening a new nail salon or remodeling and upgrading an existing salon are big projects. Equipment, furniture, products, stock, decor, advertising, signage…the list of expenses goes on and on. Then there is the time it will take for the build-out, before the salon is up and running. Even profitable salons are likely stressed to find the cash to do it right. So, where are owners to look?
Where the money comes from will depend on the individual situation of the salon and owners. The money may not all come from a single source. If you are planning to open a salon, it is never too early to hire a CPA and an attorney with experience in the beauty industry.
“You definitely need a team,” says Larry Kopsa, a CPA partner at Kopsa Otte, with 35 years of accounting experience in the beauty industry. “I have seen people sign leases that have clauses that increase rent when sales get over a certain level and the owner had no idea. I recently talked to a salon that was not making it and was shutting down. I asked the owner if she had personally guaranteed the lease. She had no idea. When she shuts down, she will still have to make the lease payments until the lease runs out or someone else leases the property.” Kopsa points out that a CPA or attorney would have flagged these things in the contracts. “Contracts can be confusing; you need a professional to assist with these matters. It will be money well spent,” he says
Check Your Credit
Assuming you have an attorney and a CPA in your corner, it’s time to do some personal housekeeping and planning. Even if you are not personally guaranteeing a loan or lease, lenders will be interested in who they are doing business with. Beneficial Capital advises that prospective clients get a copy of their credit bureau reports from Trans Union (800-680-7289), Equifax (800-525-6285), and Experian (888-397-3742). Review them and correct any items that are in error. Keep in mind that there are some items that will affect your report negatively: late payments, high debt, outstanding collections, liens, bankruptcy, judgments, too many inquiries, etc.
Lenders are going to want to see a salon with strong leadership and a well-thought-out business plan. Kopsa reminds us that a business plan is more than just numbers. “The plan shows your marketing plan, your experience, competition, cash flow, and more. There are books and software to help you build this plan,” he notes.
We were hard-pressed to find large institutions willing to talk about lending to salons. The truth is that banks are reluctant. The recent downturns in the economy and more attention to risks in banking have tightened the purse strings, though lending for salons has never been an easy task. Sue Thrash, public relations director for Langley Federal Credit Union was willing to share her insight. “We have salons as clients now and are open to lending to salons based on qualifications,” she says. “Langley Federal participates in a variety of Small Business Administration (SBA) programs, including loans and lines of credit such as the SBA 7a program, Small Loan Advantage, Veterans Advantage, and more. On most SBA products offered by Langley Federal there is only one more form for the borrower to complete to determine eligibility.”
Too many inquiries on a credit record may hurt the score, so it may make sense to align yourself with an institution with which you already have a relationship. Talking to a loan officer early in the process may allow them to help you structure your loan and prepare your financial plate. They also know the local economy and may be able to point you to resources in your community.
Most salon owners, like Loretta Edwards of Polish Me Nail Studio in St. Georges, Del., financed their salons the old-fashioned way — she saved her money and bought her inventory as she could afford it. “As a student, I saved all my tips from working in the student beauty shop. I started purchasing clearance items that I knew I would use in my studio, such as nail posters, frames, shelves, manicure tables, lamps, etc. After more than three years of searching, I found a quaint space in town and all I had to do was move in. I bought a pair of curtains for $14.99 and the rest was history. Renting a space may be a start, if financing is not available right away. It will also give you a chance to ease into the role of owner and the tasks it involves.
Other salon owners (like yours truly) borrow from family and friends. For very small loans, this might work, but it is a mine field of potential problems. Kopsa strongly advises against borrowing from relatives. “This can cause serious family problems if the money is not repaid. For example, grandma may have $50,000 sitting in a 1% CD, but if you borrow the money and for some reason cannot repay, Thanksgiving dinner with the family can be difficult. Believe me, I have seen this,” he says.
Another pitfall, according to Kopsa, is withdrawing money from retirement accounts to get started. “That can be a problem in that not only is there federal and state income tax to pay, if the person is under the age of 59 1/2, there is a federal and state penalty of as much as 15% or higher,” he says. “Assuming that someone takes $50,000 out of their pension, the federal state, and penalties can be $24,000 or more. This really can put an owner in the hole on April 15.”
The biggest obstacles are collateral and cash flow (working capital) for a new or rapidly expanding salon. Both are needed to make a loan bankable. Expect to have enough cash on hand to handle the first year (minimum) of operating expenses. Cash is needed, day-to-day, to keep the doors open while the business stabilizes. Consider leasing equipment. Leasing can solve part of the problem. Your distributor can help you with leasing and may even have staff members with design experience who can help you plan the build-out and avoid over borrowing. They may also have previously owned furnishings and equipment available.
Crowdfunding, or social lending campaigns, are growing in popularity. Sites like www.kickstarter.com and www.indiegogo.com have sprung up on the web. Unlike crowdfunding under the 2011 JOBS act, where investors should be prescreened, these small crowdfunding sites allow anyone to invest in someone else’s passions. These sites allow people to design a campaign and have others donate to the cause or venture in return for a reward. The reward may be a T-shirt or a free manicure, etc. People tell their story and entice others to help them meet a goal. Indiegogo.com currently charges anywhere from 4%-9% of what is raised depending on the type of campaign and if the goal is reached and if it is set up as a fixed or flexible funding plan. Care should be taken if you pursue crowdfunding. The IRS has stopped short of declaring if this is income or a gift, so far. As these sites spring up with increasing frequency, they will surely address it. Talk with your attorney and CPA so you are not left with a surprise bill later should they issue a ruling on how these funds are to be reported.
Take the time to plan it out in minute detail, giving you lots of cushion for the unexpected. Lay the groundwork, clean up your credit, save as much cash as possible, and reduce your personal debt while you are in the planning stages to set yourself up for the best outcome. Opening a salon is a labor of love. When the paint dries and the dust settles, you will need to be able to sleep soundly at night. After all, you will likely be pulling lots of late nights the first couple of years.
You can find industry statistics to include in your business plan at www.nailsmag.com/market-research.