Beauty Salon Business Loan Options
Hair and beauty salon businesses in Ottawa can have access to different commercial debt options including:
Canada Small Business Financing Program
The Canada Small Business Financing Program is very similar to the USA’s Small Business Administration loan that is meant for small businesses. The SBFP loans are designed to help small businesses that have revenues of less than $10 million raise much-needed capital. The SBFP shares the risk of the loan with the actual lender who administers the loan. If a borrower defaults, the SBFP guarantees a certain percentage of the shortfall.
SBFP loans are backed by the government and have several benefits such as longer repayment periods compared to commercial loans, lower down payment requirements, and interest rate caps. Finally, SBFP loans have higher principal amounts compared to commercial loans that are associated with strict risk assessment.
One disadvantage of the SBFP loans is that an asset is required to act as collateral such as a home or car. When a borrower defaults the loan, the lender will have a claim on the asset to compel repayment of the loan.
Businesses can also make purchases on credit just like a consumer. A business credit card enables a business owner to make purchases from a merchant on credit. At the end of the month, the business will use its funds to pay off the credit purchases just like with the normal credit card.
A major advantage of this credit option is better management of capital since cash can remain within the business for extended periods rather than getting money tied up in purchases and inventory. The business credit card can be used to fund operating expenses such as overheads, wages, and inventory.
Business credit cards have the disadvantage of high-interest rates for all overdue amounts just as is the case with consumer credit cards. The effect is that a business may find itself in a debt cycle.
Revolving Line of Credit
The revolving line of credit also referred to as revolver works similarly to a credit card. In this type of financing, the lender will agree to provide a nominal sum of capital to the business at a specific time depending on set out conditions and covenants. Interest is calculated on the average amount outstanding for the loan. The unused portion of the loan is charged a lower fee rate which represents a small compensation for the bank committing that amount of capital.
The revolver is a highly popular option for hair salons, spas, beauty salons since it provides a business with the flexibility to borrow depending on its needs or fluctuations of demand. The business benefits in such a way that it is not held to a fixed principal amount but can take out money responsibly as per need and volume of business to be serviced.
The flexibility of the loan ensures a business can take advantage of volume discounts if available. For example, the business can easily get inventory at very low prices using a revolver from a supplier going out of business and offering his products at big price cuts.
Terms loans are the classic and popular financing option. The loan option entails a borrower getting a fixed sum of cash from the lender at a specified rate and for a pre-determined length of time. An agreement is signed between a borrower and lender that stipulates the conditions of the loan and repayment terms usually made monthly.
Advantages of the term loan are a fixed amount of cash is provided which allows for financial forecasting and budgeting. The versatility of the loan ensures that businesses can use it to make purchases of anything right from inventory and supplies to payment of wages to renovations.
The downside of the term loans is that they attract high-interest rates compared to the SBFP loans mainly because the banks take on the risk of the loan. Ensure that you take special care with these loans since collateral is usually personal assets that a bank may lay claim to if a default is made on loan repayment.
Equipment financing sees a lender provide a fixed sum of cash to the borrower with the sole purpose of buying a fixed asset for their business. The equipment loan will then be repaid similarly to conventional loans. Defaulting on payments will force the lender to seize the asset bought using the loan.
The major benefit of this type of loan is the fact that it is secured using the purchased equipment making the lender have no claim on personal assets. Setting up a salon business may demand a large capital outlay that can be raised through equipment loans that do not place personal assets at risk.
One notable disadvantage with the loan is that it can only be used for the purpose that it was approved for. It will be used to purchase an asset and not to finance business operations or other purposes.