Even with the economy starting to turn, owners and would-be salon owners can struggle to access funding. Julio Vildosola looks at how to maximise your chances when going to a lender.
Obtaining access to finance in the current economic climate can be challenging for any business, and for hairdressers in particular the options can be limited.
This is largely because, as many salon owners lease their premises on a short-term agreement, they are unable to borrow against the value of their premises.
The example of Lauren Taylor is probably a pretty typical one within the industry.
Lauren is a freelance hairdresser based in Hertford. Having established a viable hairdressing business she is now keen to open her own salon but securing finance has been something of a stumbling block.
“There have been a number of lease premises that have been suitable for my salon but I can’t get the finance quick enough to secure one. Banks aren’t willing to lend in the current economic climate, and I don’t have access to funds from friends or family,” she explains.
So what’s the answer?
The first point to make is there’s no magic wand solution here. Just being passionate about your business may not be enough to secure you funding.
You need to do your homework. If you have a clear idea of where you stand currently, have put together realistic projections and have even a basic grasp of the options most likely to be on the table you are going to be in a much better position.
You may still, like Lauren, find it a battle but at least you’ll be vastly improving your chances.
Secured finance is only available to owners who own the premises in which they are based.
If you are able to go down this route you’ll need to provide a valuation of the premises and take a loan at a percentage of the valuation, which will be added to the existing mortgage on the property.
This type of loan can be secured against equity on your home; however this is not advised as you will be at risk of losing the property if your business subsequently experiences financial difficulty.
The advantage of taking out a secured loan is you can expect lower interest payments and long repayment schedules, as well as options for debt consolidation.
But don’t neglect to account for the associated extra costs you’ll probably incur. These are likely to include the cost of getting the valuation as well as legal fees. There will also be a limit on how much you can borrow against your existing assets.
Secured loans don’t tend to take ongoing company cashflow performance into consideration, therefore your asset – your premises – is at risk if repayments aren’t met. It is important you are aware of the terms of your fixed repayments and confident you will be able to keep up.
Unsecured finance is normally considered if you don’t own your premises or if you are looking for a faster and more flexible cash injection.
In contrast with secured financing, unsecured funding does consider the value of the company’s cashflow, potentially making it attractive to owners who don’t want to offset against personal assets.
Not only does this mean the risk is shared between you and the lender, there are no hidden legal fees or valuation costs. But the same detailed preparatory leg-work is required in terms of having a clear idea of where your business is financially and realistic projections for the future.
You normally agree a fixed interest rate and repayments for the life of the loan, but do be aware there is likely to be an upfront arrangement fee. There may also be an option to repay the loan early, though some lenders will charge an additional interest fee for doing this.
Friends and family
The final option to consider, and one of the most popular, is friends and family. If you are able to borrow a sum of money from a family member or friend it will normally be a cheap and easy way of securing finance.
However, it is important to be aware of the impact bringing money and debt into the equation could have on your friend or family relationships, especially if the business does not go as well as hoped.
Three questions to help you decide the best funding option
- Do you own your premises? If “yes”, a secured loan may be your best option. Visit your bank and determine if there is any funding available or, if you have reached your loan limit, alternative options. If “no”, and you don’t have the option of borrowing from friends and family, it is best to look at unsecured options.
- When do you need the money by? Secured finance typically takes 90 days from application to receipt. Therefore, if you have an immediate cash requirement a faster and more flexible finance option, such as an unsecured loan (which can be approved in as little as two weeks), may be a better bet.
- What are you using the money for? When considering alternative funding, think about what you plan to spend the money on. This may sound obvious but, for example, if you are looking to secure a new leasehold then it can prove difficult to do this without already having existing finance in place!
Julio Vildosola - Liquid Finance