Best Business Loans for Nail Salons
Whether you run a nail salon now, or have several years in business, this is a great industry for entrepreneurs.
Dominated by mom and pop salons, newcomers won’t face much competition from franchises as they occupy only 3% of the industry space. The barriers to entry for a nail salon are fairly low – it costs an average of $75,000 to $125,000 to build out and open a new salon. The cost depends heavily on square feet, and you could save money purchasing used equipment.
The industry is growing – after a tough year in 2020, it’s rebounding and expected to grow 18% in 2021. By 2025, the industry will have a total value of $22.6 billion. The average nail salon grosses an estimated $287,000 in revenues and has a 17% profit margin. With a small opening investment, you could realize a healthy revenue stream and return on investment in a short timeframe.
But the question is – where do you obtain the capital needed to open a new salon? For existing business owners, you might need access to capital to expand or upgrade your equipment. Read on to find out the questions you should answer before borrowing and the best business loans for a nail salon.
Questions to Ask Before Borrowing for a Nail Salon
Answering a few basic questions before applying for a loan can help make borrowing a success. Knowing why you need to borrow and how much, as well as your business’ cash flows and credit position will guide you to the right loan product and lender.
Why Do You Need to Borrow?
Start at the beginning – the reason you need to borrow. Has it been a slow week and rent is due? Or, maybe you want to open a new storefront and expand into a nearby strip mall?
If you need short-term, quick funding a working capital loan could work best for your needs. To fund a larger, more long-term need, consider applying for a small business loan. To purchase new pedicure spa chairs, look into equipment financing or a secured borrowing.
Each of these loans will have repayment terms that match why you’re borrowing. It makes no sense to be making payments on a loan after you’ve received its benefits. Get clear on why you’re borrowing before applying so that you pick the best loan for your business.
How Much Do You Need to Borrow?
Knowing the answer to why you need to borrow also dictates how much you need to borrow. Once you have a plan in place, budget how much money you need to realize that plan. When you apply for a loan, you want to request enough capital to cover all your needs.
Price out the cost to secure and build out a new location, including purchasing pedicure chairs and sanitation equipment. If you’re applying for a working capital loan, consider requesting enough to cover a few month’s expenses while business picks up. It’s important to have a concrete figure in mind when you approach lenders and apply for funding.
The risk of under borrowing is that you’ll fall into debt stacking – borrowing on top of existing debt to complete a project – or a debt cycle – borrowing again as soon as one loan is paid off. Both situations can harm your business’ financial situation and long-term success.
How long have you been in business?
The nail salon industry saw inconsistent growth up to 2018, and was obviously hurt during 2020. While the industry is rebounding, lenders may still be wary of lending capital to newer businesses.
Traditional lenders often require that borrowers have been in business two to five years, but alternative lenders will lend if you’ve been in business as little as two months. They look at your cash flow and other factors when making a lending decision. While you may pay higher rates to borrow from an alternative lender, with a short business history they’re your best option.
What is Your Credit Score?
A credit score is a numeric representation of your credit worthiness. Credit bureaus look at your past payment history, existing loan balances, and any delinquent or missed payments to calculate a number. Lenders use it as part of their risk assessment during a loan approval process.
Traditional lenders prefer to work with borrowers who have credit scores above 650. For some loan products, they require a minimum credit score above 720. It’s a good idea to find out your credit score before wasting your time applying with a lender who might reject you for having too low a score.
If you do have poor credit, you can save time and approach lenders willing to extend you credit. Alternative lenders extend capital to borrowers with scores as low as 550.
Which repayment terms work best for your nail salon?
Even if you have great credit, and could take out a loan at a bank, the loan’s repayment terms might not work for you. A loan’s terms include its interest rate, how often you’ll make payments, the size of the payments, and how long you’ll repay the loan.
Traditional lenders typically offer amortizing loans – loans repaid by a fixed amount over a set period. If you took out a loan with a bank, you’d likely make a large, monthly payment on the same day of the month. But this repayment schedule doesn’t always match your cash flows.
If you have uncertain cash flows, or a cash flow pattern that would make a fixed repayment schedule difficult, consider alternative lenders. With a merchant cash advance you could make small, daily payments from your credit card receipts. Other loans have weekly or bi-weekly options. Before applying for a loan, analyze your budget and cash flows and pick a repayment plan that works for you.
Best Business Loans for a Nail Salon
Once you know the answers to each of the above questions, you’ll have a good picture of how your loan application will appear to a lender. As well, you’ll probably have a clearer picture of which of these loans will best suit your needs.
Working Capital Loans for Nail Salons
Working capital is a term that refers to a business’ daily operating expenses. Rent, payroll, and utilities fall under the banner of working capital – and lenders offer loans specifically designed to cover these expenses. If you’re experiencing cash flow issues in this area, this is likely the best loan for you.
A working capital loan is a short-term loan that has less documentation requirements to qualify for than a traditional bank loan. It can fund it in just a few days, as it’s designed for emergency needs. The interest rate on a working capital loan ranges from 9% to 45%, and you’ll have a year to three years to repay it.
Alternative lenders will fund a working capital loan if you have a credit score above 650 and minimum monthly revenues of $10,000.
Short-Term Business Loans for Nail Salons
A short-term business loan better fills a larger funding need, such as an investment in new spa stations or a remodel. While they’re called a short-term loan, this is because lenders view anything less than a five-year repayment term as “short-term.” You can take up to three years to repay them.
With this loan, you’ll need two years of business history, a credit score above 650, and minimum monthly revenues of $10,000. Interest rates range from 9% to 45%. It could help fund the estimated $20,000 in supplies you need to stock a new salon.
Merchant Cash Advances for Nail Salons
Do your clients primarily pay by credit card? Then you could be a good candidate for a merchant cash advance or MCA. With this loan product, lenders advance a sum of money based upon your past credit card sales.
To qualify, you’ll need a credit score of at least 500, two months in business, and minimum monthly revenues of $8,000. The lender will request statements proving your credit card sales for the past few months. Based on these, they’ll estimate future sales and advance you an amount against that estimate. Because sales matter more to the lender than time in business or credit score, it’s a great loan product if you’re newer or have bad credit.
A MCA is that it’s repaid through deductions from your credit card sales – you don’t have to budget for a large, monthly payment or worry about saving enough money to pay it. The merchant cash advance lender automatically takes their repayment with each swipe. However, you pay for this convenience, as interest rates are between 24% to 49%.
Whatever your capital needs, Shield Funding can meet them. We offer a variety of loan products for businesses at different stages, and can fund quickly. Reach out to talk to a loan specialist today.