The Ultimate Guide to Hair Salon Financing

Find out all about:

• Hair Salon Financing Options
• Overcoming Financial Barriers
• Preparing Your Financing Application

After gaining several years’ experience behind the chair, many stylists often dream of opening their own salon. But starting a small business can be challenging and it can often be difficult to secure the necessary funding to get the operation off the ground. 

Whether you’re opening a salon or making improvements to grow your business, taking out a business loan can help you achieve your goals. Having a solid plan for approaching banks or investors can also help you avoid facing potential pitfalls and ensure you get the money you need to cover your start-up costs or expansion project. 

Read on to learn more about the different types of salon business loans available and useful tips on how to prepare a successful financing application for your small business. 

Hair Salon Financing Options

Because of potential risks in a hair salon and typically inconsistent income throughout the year, banks and investors consider this type of business high risk. So, you may have to explore alternative options to find a lender willing to take the risk. Choosing the right type of lender could mean the difference between getting funding quickly or waiting months only to be denied at the final stage. 

Different types of lenders may be best for specific salon funding needs. If you require start-up funds to hire stylists and furnish your new salon, a long-term loan with a low interest rate might work best. To fund a major seasonal marketing campaign for the holidays, you may do better with a short-term loan that you can pay back quickly right after the busy holiday season. 

Some of the most common salon financing options to consider include:

Traditional bank financing

Banks are one of the largest lending institutions, and they typically have lower interest rates than other financing options, but it can sometimes be difficult to qualify for a traditional bank loan. Banks usually require a strong credit score and good financial standing, so existing salons with a long history of profitability are more likely to be accepted.

Alternative lenders

If you cannot get a traditional bank loan, then alternative lenders might be able to help. Alternative lenders are similar to banks, but they have more relaxed requirements for lending. The terms are often not as good as if you go through a traditional bank, so you may end up paying more in interest and fees. 

SBA bank loans

The Small Business Administration (SBA) can help small businesses access funding by reducing the risk to the lender. More than $44.8¹ billion in funding was delivered to small businesses across the U.S in the fiscal year 2021 through the SBA’s core lending scheme. 

The SBA offers a wide range of loans that can help cover the cost of hair salon business funding. They also have programmes designed to help specific groups of business owners, such as women and minorities. You can apply for an SBA loan even if you have been denied a traditional loan. 

Angel investors 

Angel investors finance your salon in exchange for part ownership of your business. These investors may be someone you know personally, or you can set up meetings to pitch to local investors. Angel investors typically like to fund innovative concepts or businesses that match their personal interests, so you should research what kind of projects a particular investor has funded previously before you pitch. 

Good candidates for angel investment might be someone who wants to open a salon that focuses on high-end ethnic hair care or an existing salon that has developed an exciting new product line they want to expand.

Business credit lines

A salon business credit allows you to borrow a specific amount of credit to pay for small to moderate expenses. This type of financing often comes in the form of a business credit card, or you could get a business credit line through your bank that lets you access the money by adding cash directly to your salon’s business checking account.

Equipment financing 

Loans for equipment financing use the salon equipment you plan to purchase as collateral. Banks and alternative lenders can provide and service this type of loan, and they are often easier to acquire than traditional loans because they reduce the risks for the lender. If you default on the loan, the lender can seize the collateral.

You may require multiple forms of financing for different aspects of your business. An equipment financing loan could cover the costs of upgrading your salon chairs, while an instalment loan from an alternative lender or a business credit card can help cover the costs of a new marketing campaign or an expansion of your inventory.

Overcoming Financial Barriers

Once you’ve decided what type of financing fits your business goals, and what kind of lender might be willing to loan you the funds, you’ll need to look for ways to address any potential financial barriers before you submit an application.

Credit score and history

One major pitfall for hair salon financing is asking for too much without a track record to back your funding request. Many lenders are unlikely to approve funding for a small business with less than two years of operation. If your business doesn’t have an established financial history already, the bank may look to your personal credit score to determine creditworthiness. Maintaining an excellent personal credit score can help you secure financing for your salon business.

Income

Building up some cash reserves before applying can also help lenders feel more comfortable about giving you money. Some financial institutions require you to have a specific level of cash reserves to qualify for a loan, while others may offer more favorable terms to salons that can prove they have the cash on hand to start repaying the loan.

Top tip: When you’re searching for a lender, look for one that has prior experience lending to salons or beauty businesses to ensure that the lender is already familiar with how your industry works. A lender who knows the beauty industry may be able to suggest ways to get around potential financing barriers or give ideas for structuring your application in a way to make it more likely to succeed.

Preparing Your Financing Application

Start early

The biggest pitfall for acquiring hair salon financing is starting too late. The earlier you start the process, the better rates you have access to and the easier it is to acquire funding. Get all of your salon financials in order before applying and make sure your funding request is in anticipation of future needs, not based on an immediate emergency.

Before you can secure financing for your hair salon business, it’s also important to make sure you have the following documents in order as this can help the application process run smoothly.  

Develop a business plan

If you’re just starting out or planning to open a second location, you’ll need a solid business plan in place that breaks down the specific amount of money you wish to borrow and what you plan to do with that money. This includes whether you plan to rent or buy salon equipment, the rental costs of the building you plan to occupy and the cost of any necessary renovations before you open.

Gather financial records

If your salon has been operating for a while and you are seeking funds for expansion or improvements, you’ll need financial records showing your past performance in addition to a business plan describing your monetary needs. Federal tax returns, sales data and bank records show your lender that you have sufficient monthly and yearly income to repay a loan.

Other financial forms your lender is likely to require include:

• Income and expense statements
• Current statements on outstanding accounts receivable and accounts payable
• Personal financial statements for any owners of the salon
• Current business account statements showing the cash equity you have on hand.

Acquiring financing and securing salon business loans can help your salon thrive if handled correctly, while preparing for potential pitfalls ahead of time ensures that your application runs smoothly. Learn how Groupon works today and gain access to a network of experienced merchants, as well as a host of resources that can help you grow your business for success. 

1. https://www.sba.gov/article/2021/nov/24/fact-sheet-us-small-business-administration-delivering-support-americas-small-businesses-helping