Money Matters

The Money Hunt

Opening your own salon requires patience, skill, and creativity. It also requires a considerable sum of money. If you’re one of the many who don’t have a fortune tucked away somewhere, read on for some sound financial advice.

illustration/Mark James
<p>illustration/Mark James</p>

In today’s world, many people feel they are not capable of achieving the American Dream of owning their own business. They have all the know-how, skills, and wonderful personality but they lack the most important item: money.

Many dreams of business ownership go unrealized due to lack of money. People don’t realize there are alternatives to borrowing from family members or depleting personal savings accounts. (Many of us don’t even have these to choose from.) There is no reason to let your dreams slip by ---financing is available to the average person even if she is looking to obtain what seems impossible.

Small business bank loans and equipment leases are two options available to nail technicians. First, let’s discuss small business bank loans. For someone who is just beginning to get her business off the ground or who has no business credit history, the bank will ask for the following preliminary paperwork:

  • Complete business plan
  • Personal tax returns going back at least three
  • Personal financial statement
  • One year income projection
  • Resume of owner(s)
  • Completed bank application

The terms of the loan, the fees involved in closing, and the bank’s requirements may differ slightly depending on the type of loan and the bank. The rule of thumb, however, is that a minimum small business loan is $25,000 and the maximum is $500,000. If the loan is used for real estate acquisition, building renovations, or leasehold improvements, repayment can be stretched up to 25 years. For equipment and other fixed assets, the term is up to 10 years. If the loan is used for working capital, the term can go up to seven years. In addition to interest on the loan, the bank charges guaranty fee of anywhere from 5%-10% of the loan amount. This fee covers the costs associated with processing a loan application and is due at closing. So, if you borrow $25,000 and the guaranty fee is 5%, you will need to pay $1,250 up front. Bank financing is usually at a variable interest rate, meaning it changes every month as the prime rate changes, and it is typically set at 2%-2 ¾ % above the prime rate. So if the prime rate is 8 ½ %, the actual lending rate would be 10 ½ %-11 ¼ %.

                As collateral for the loan, the bank will place a lien on all equipment, fixtures, and goods now owned and purchased at any time in the future by the business; in addition, real estate may be required as additional collateral. The borrower’s personal guaranty is also required, meaning she will have to pledge personal assets, such as a house, as a guarantee that the loan will be repaid, and she will also need to provide hazard insurance on all collateral owned and purchased. After all this, it’s time to wait. And wait. Approval time can be anywhere from 60-90 days.

SBA to the Rescue

In response to critics who complain that banks are unresponsive to small and start-up businesses, especially women-owned businesses, the U.S. Small Business Administration (SBA) recently enacted a program called the Women’s Prequalification Pilot Loan Program. Instead of requiring the applicant to get approval from a bank before applying for an SBA guarantee (the SBA doesn’t actually lend money; it simply offers participating banks a guarantee that the loan will be repaid), this new program actually helps applicants at the beginning of the process. The SBA connects an applicant with a local non-profit agency to help her with her business plan and bank application. That agency then submits the information to the SBA. The SBA reviews the application and makes an approval decision within three days. If approval is given, the SBA sends a prequalification letter to the borrower, who can then show the letter to the bank of her choice. There are 16 areas that currently offer this pilot project: Buffalo, N.Y.; Charlotte, N.C.; Chicago, Ill.; Columbus, Ohio; Louisville, Ky.; New Orleans, La.; Philadelphia, Pa.; Portland, Ore.; St. Louis, Mo.; San,  Francisco, Calif.; and throughout the states of Colorado, Maine, Massachusetts, Montana, New Mexico and Utah.

The requirements for SBA-guaranteed loans are somewhat less formidable, as well.  For instance, collateral requirements are primarily the ability to repay, a good business plan, and good credit. “We look at your cash flow projections, determine how much you need for overhead, and make sure there is enough left over to make your monthly loan payments,” explains Mike Stamler, a spokesperson for the SBA in Washington, D.C. Although a personal guaranty is warranted in some cases, loan applicants will not be turned down if inadequate collateral is the only unfavourable factor. However, the borrower must have a reasonable stake in the business, ideally 25%-35%; it’s a sign to the lender that you are serious about making this business a success if you are investing some money of your own.

Often women starting their own salon need relatively small amounts of money to get started. Venture capital in the millions or “small” bank loans of $100,000 are simply not necessary to pay the lease on a site, buy equipment, and open for business. For loans of $25,000 or less, the SBA has started a “micro-loan” program that encourages community agencies to invest in small businesses in their area. A private non-[profit group approved by the SBA as having the ability and experience to make and service small loans, as well as provide business management counselling, works as the liaison between the borrower and the SBA. This program is targeted at borrowers with few, if any, funds to contribute to their new enterprise, but who are seeking ways to become self-sufficient and to provide for their family. Stamler says that the average size of an SBA micro loan is just above $10,000.


Hidden Treasures to Find

The SBA is not the only agency providing small or micro-loans. There are a growing number of private agencies, including investment groups, leasing companies, and nonprofit groups in addition to those associated with the SBA, that provide loans and/or business assistance to women entrepreneurs. The Women’s Business Development Center (WBDC) in Chicago, for example, provides many different kinds of assistance, including help with loan packaging. “Our applicants are rarely looking for more than a $25,000 loan,” says Jaribu Kitwana, a finance counsellor for the WBDC. “They also usually need help with their business plan. They usually have one, but it often doesn’t address the needs of the lender.” The WBDC sponsors a four week course called “Fast Track to Business Ownership,” which summarizes what is needed in a business plan. A 13-week course called “Jump Start Your Business” provides a certificate upon graduation, and is a comprehensive training course on all aspects of a running a business.

In New York, the Women’s World Banking network has helped put together more than 200,000 loans since its start in 1979, and loans average just $300. While many of these loans were made to women in developing countries, the program is now active in many inner cities, rural areas, and suburbs in this country. It is also  attempting to group small businesses together to form enterprise networks with greater purchasing and marketing power. Other similar groups include Women’s Initiative for Self-Employment (WISE) in San Francisco, Women’s Self-Employment Project (WSEP) in Chicago, and Good Faith Fund in Pine Bluff, Ark. These groups are either self-funded through grants and participating sponsors or they work closely with area banks. Some require participants to form loan groups, which administer and approve loans to each other and to new applicants. Getting a loan through a leasing company is another alternative form of financing available to salon owners-to-be . These loans are used primarily to buy equipment or for renovations, and are anywhere from $2,000 to $150,000. In the beauty industry, a leasing company might be a furniture or fixture company that advances money to a customer in exchange for purchasing merchandise from that company. The following are typical requirements for obtaining a leasing loan:

  • Copy of nail or cosmetology license
  • Must have worked in a salon for two years
  • Tax returns or 1099 forms from at least the past two years
  • Copy of lease or name of landlord
  • Must open up a business checking account with a deposit of at least $1,000
  • Completed lease application

You have anywhere from one to five years to repay the loan, and the interest rate is fixed somewhere around 10%. Since the loan requires no additional collateral other than the equipment and/or furniture purchased, it also requires a first and last month payment as well as anywhere from 10% to 30% of the total lease amount due at the signing of documents. The borrower must also provide a personal guaranty and have hazard insurance on all equipment. Approval time can be as little as 24 hours.

Have We Passed Go Yet?

If you are determined to open the salon of your dreams but don’t know where to start, remember that a healthy business is designed and built on solid research. A sound way to start this process is to discuss your plan with an accountant who specializes in small business. This will be money well spent. The next step is to find a local beauty distributor in your area who will provide detailed data about the number of salons in your area and help you make good buying decisions. The distributor may be willing to extend you credit for supplies and inventory if you have a good credit history, and may also be able to link you with a leasing company that specializes in the salon industry if that is the route you decide to take.

Whatever way you end up financing your salon, remember that success doesn’t happen overnight. Unless you have a rich uncle, you’ll undoubtedly find that starting a new business means you’ll have to tighten your belt for a little while. But in the long run, with determination, skills, and confidence, you’ll find business ownership is no longer a dream. It’s the real thing.

These Women Mean Business

You don’t have to be an Atlantic City dealer to know the numbers game just ask Jackie Lopez, co-owner of Cuticles in Staten Island, N.Y. Lopez, a 12-year veteran of Wall Street knows her way around a ledger that’s why she and partner Marilyn DelGuadio make such a good team. “Marilyn is the hands-on part of it.” Lopez explains “She can look at a clients nails and know exactly what needs to be done. I’m the numbers person. I’m used to paying the bills and keeping everything on the level.”

Their experience and talent impressed a leasing company enough to extend them a loan to help buy furniture and fixtures. The partners had enough to buy everything up front, but they wouldn’t have been able to get the quality they wanted. A mutual friend who was familiar with restaurant leasing encouraged them to look into a loan through leasing, and found a company in New Jersey that had such a lending program. “It was a lot of paperwork,” recalls Lopez. “You have to prove you’ve been in the salon business for at least two years with W-2 forms to prove it. Some technicians work on tips, and don’t necessarily have everything in their books. If you don’t have good credit, you’re sunk.” The interest rate was below anything available as a personal bank loan or through credit cards, and the term of the loan was three years.

The loan enabled Lopez and Delguadio to buy expensive tables and chairs and all the fixtures they needed to get started. They are slowly building up their clientele and are happy with the way their salon looks. “It’s clean, sanitary, and we have excellent technicians that work here.” Lopez says it seems these partners were dealt a winning hand.

Money for a Rainy Day

Shannon Rose knew exactly what kind of salon she wanted to open. She just needed to give her financial history a little jump start. The owner of Nailing Them by Shannon in Chicago had been a nail technician just three years before opening up her own salon last year. She got a $6,000 business loan through the Chicago Association of Neighborhood Development Organization (CANDO), which she needed primarily for establishing her business credit. “I had enough money saved for the rent, and I used my credit cards for supplies.” Rose says “The $6,000 loan will be my reserve capital until I can establish myself.” She could have received a loan through a bank, but it would have been a personal loan with higher interest rates. The fact that this loan helped her qualify for a condominium mortgage didn’t hurt, either.

Since Rose had already written a business plan, she did not have to wait long for her loan approval. A friend tipped her off about the Women’s Business Development Center in Chicago, and they in turn referred her to CAN DO Rose was equipped with research such as how many residents lived in her area, and what kinds of services she would have to offer to make her salon stand out from the crowd. Impressed by her knowledge and creativity, the lenders approved her application in less than three weeks.

Rose has big plans for her unique salon, which is situated in an old theater with a unique, artsy decor. Now all she needs are a few good nail technicians in the Chicago area to help her build her dream. Any takers?

Too Little, Too late

Last year, Lon Rader was approved for an SBA guaranteed loan. But when the bank handed her a check for $157,000 she turned it down “It was a simple matter of too little, too late.” Recalls Rader, who is the owner of three Nails That Look Like Nails salons headquartered in Whitehall, Ohio, as well as Nail Supply Center in Reynoldsburg “By the time I was approved, I decided it wasn’t in my best interest to buy the salon property I was leasing.”

Rader’s first attempt to get an SBA loan was rejected. She discovered she had to have at least three years’ worth of profit-and-loss statements before the bank would consider her application. So she grew her salon slowly investing profits back into the business until she was able to start two more salons.

When her property came up for sale eight years later Rader decided to apply for a loan once again. She located an SBA-approved lender who gave her a binder-full of forms to fill out.  Rader completed the paperwork and submitted it. That’s when the run-around began. “Every time I turned in a set of forms, the lender called me back and said the SBA had additional requirements, says Rader. In the meantime, the 90-day limit on her financial statements kept expiring so Rader’s accountant had to keep updating and resubmitting them. After the fourth or fifth round, Rader gave up She discovered later that the SBA didn’t receive her application until more than a year after the ordeal started to this day, Rader doesn’t know why she was treated so unprofessionally. Meanwhile, Rader was approached by another SBA lender eager to do business with her. She submitted paperwork and within three weeks she was approved for a loan. However, Rader decided to turn down the offer.

Did she just get fed up? “Frustration was part of it, but I also discovered some problems with the property that would have been expensive to fix.” Rader says she continues to rent space and is in the process of helping her sister open a fourth salon in the area. The financing comes from “a very successful business” as well as a handy father and husband who built all the hair and nail stations for Rader’s salons. She hasn’t given up her dream of owning her own property. So the next time Rader applies for a loan, she’ll certainly know what to do.

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