Business Loans for Salons and Spas

Because they are backed by the government, there are several beneficial aspects about them including longer term lengths than commercially-provided loans, interest rate caps, and lower down payment requirements. In addition to that, all else being equal, SBFP-backed loans also have higher principal amounts than standalone commercial loans as commercial banks have strict risk parameters.

That said though, there are downsides to this type of loan as well. SBFP-backed loans typically have a personal asset as collateral such as a home or car. If the borrower defaults on the loan, the lender then has a claim on that asset, which they can use to ensure they get repaid.

The primary advantage for this type of credit option is better working capital management as cash then remains in the business for longer periods of time rather than being tied up in inventory or other purchases. The credit card can also be used to finance most operating expenses including inventory, overheads and wages.

The disadvantages though are the same as a consumer credit card, which include high interest rates on overdue amounts, which can lead to a debt cycle.

The revolver is a popular option for beauty salons, hair salons, spas etc. because it provides a business with the flexibility to borrow more in one period and less in another as per the fluctuations of demand. The business is therefore not on the hook for a fixed principal payment each period and can manage its money responsibly as per the volume of business they need to service. Furthermore, it can also help a business take advantage of volume discounts if offered. For example, if a supplier is going out of business and offering its products at deep price cuts, the business can use the revolver to take advantage of this situation and gain inventory at a low price that can be used for an extended period of time.

The advantages of the term loan include a fixed sum of cash provided, which allows for easier budgeting and forecasting. The term loan is also versatile in the sense that business owners can use it to purchase anything from inventory and supplies to paying wages to renovating the storefront.

The cons of such a loan though are that they generally come with a higher interest rate than the SBFP-backed counterparts as the bank alone is taking the risk on this type of loan. Special care should be taken for loans that are backed by personal assets too as a default could lead to the bank having a claim on those assets.

The main disadvantage here though is that the loan can only be used to buy a fixed asset relevant to the business’s operations and nothing else.