Posted : 11/01/2001

Posted : 11/01/2001

Looking For New Equipment?
Check Out Your Financing Options

by Jeff Grissler

Whether you are buying one bed or 20 beds, you are about to embark on probably the most expensive part of doing business. Therefore, understanding your financing and leasing options is essential to getting the best bang for your dollar.

Leasing vs. Conventional Financing

Most salon owners start their businesses with sweat equity and savings accounts, and in many cases, run short of monies due to cost overruns. Murphy's Law always strikes halfway through the project when your architect informs you the electrical setup isn't adequate or the tanning rooms are too small.

Where can you turn when your salon project is $10,000 to $15,000 over your initial budget? Many people believe they can walk into their local bank and borrow the monies needed to complete their project. Unfortunately, commercial banks always have perceived indoor tanning as a high-risk cash industry. By nature, banks are very conservative, and many believe the risk is so high that they will not even return the calls of a small business inquiring about a loan. Banks prefer large companies with strong and stable track records.

Most indoor tanning salons do not fit into the "large company" bracket. Most have not been around long enough to have proven themselves as successful businesses. Salons with fewer than three years of history are considered startups by bankers and stand little chance of obtaining a loan.

Consider this: If trying to obtain a bank loan, a salon owner will need three years of business financial statements, personal and business tax returns, a personal financial statement and realistic collateral coverage such as a house, car or substantial cash deposit to act as a secondary source of repayment. You also must be able to show the bank reasonable proof of your ability to service the proposed debt, and you'll need some industry and business background.

The fact is you will not be able to get a loan unless you can document adequate income to repay it, as well as the ability to support your current lifestyle. So, what does a current salon owner looking to expand--or a new salon owner looking to open a salon--do? Well, there are other means of financing available that exist--such as leasing.

Leasing is the alternative form of financing that operates with realistic lending criteria. Leasing companies are much more aggressive than banks because federal banking regulations do not apply and non-bank lenders' profits come exclusively from lending.

Leasing companies have the ability to assist salon owners in financing equipment purchases along with renovation costs. Additionally, they also can accommodate all applicants, whether they have been in business for 20 years or are in the early stages of devolopment.

Most leasing companies have programs in place to finance as much as $75,000--and all a business owner has to do is fill out an application. The typical business requirements include two years under current ownership, a $1,000 bank balance and three trade identifying suppliers used in daily business.

A typical credit application consists of a personal credit report, business credit report, business bank reference and the three trade references. Once the application is complete, the finance company submits it to their funding sources and a decision is made.

The catch is that leasing money involves paying higher interest rates--typically 2 percent to 4 percent higher than a bank currently charges for a loan, because there are no closing costs associated with leasing.

Why? First, the salon leases equipment from a company who sells equipment. The equipment then becomes the collateral. Should you default on your lease, the equipment is taken back and resold and you are responsible for paying the difference. A bank would take the collateral and not even consider taking back the equipment.

The positive aspects of leasing are numerous. Leasing allows for the conservation of capital that may be retained and utilized elsewhere to increase profits. Additionally, leasing is a predictable budgetary tool since payments are fixed and not subject to fluctuations by the prime rate.

Leasing also allows for the preservation of bank lines of credit that can be completely unencumbered for short-term borrowing. Leasing companies also will not be looking for a large down payment, and there is no penalty for pre-payment.

Finally, leasing is a hedge against inflation as it allows salon owners to receive the benefit of equipment today by paying with tomorrow's dollar. What more can you ask for?

Female Entrepreneurs & Banks

There are many characteristics that make successful business people--that indefinable quality, enormous physical ability and a competitive drive so highly evolved that excelling is like breathing (call it what you will--killer instinct, the right stuff or perhaps the eye of the tiger).

Many women have all these attributes and could be successful business people, but lack the most important factor--capital. This is especially interesting since female-owned salons make up nearly half of the indoor tanning industry.

Not long ago, the only negative thing that seemed to exceed female entrepreneurs' need for financing was the way bankers treated them. As a result, many women were forced to finance their businesses using alternative means such as credit cards or loans from friends or family members. Others simply lost hope of starting or expanding their businesses. For women it seemed there would never be a day when a banker would accept a business loan application with a straight face.

Banks finally are starting to understand that more working women are driving the economy. Female-owned businesses--including indoor tanning salons--are doing extraordinarily well. This has become a strong market for the banks and they realized that they must put more time and effort into supporting the leading female entrepreneurs.

Why, after decades of struggles, have women suddenly shot forward in the capital game?

Not only have female business owners become more savvy about banking matters and built businesses that are more stable and mature, but the banking community has experienced an awakening. They've made tremendous efforts to reach out to female business owners, taking a proactive role in making the relationship better.

Banks through the Small Business Administration (SBA) have a simple heartening mission--to secure financing for women entrepreneurs that might not be able to obtain it, but still have a good chance of succeeding. These loans are not centered on collateral, but on character, credit and the applicant's ability to repay the loan from earnings, experience in the industry or other evidence of management ability.

Various SBA Programs

The 7(A) Loan Guarantee Program
The general SBA loan program officially is known as the 7(A) Loan Guarantee Program. This means SBA guarantees business loans rather than makes them. You still have to borrow the money from a bank or another lender, but the SBA guarantee increases your chances of getting the funds. The highest possible guarantee is normally $750,000 or 75 percent of the total loan amount, whichever is less. For loans of less than $100,000 the guarantee usually tops out at 80 percent of the total loan.

SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. Still, you can expect to pay a one-time guarantee fee and a yearly servicing fee, which the agency charges the lender and allows the lender to pass on to you.

The LowDoc Program
A general loan may suit your business's needs best, but the 7(A) program also offers several specialized loans. The LowDoc Program promises quick processing for amounts less than $100,000. "LowDoc" stands for "low documentation," and approval relies heavily on your personal credit rating and the business's cash flow.

The LowDoc is probably the closest you'll get these days to a good, old-fashioned loan. That fact combined with the favorable interest rates, fees and maturity terms offered by the SBA, makes LowDoc an unusually good deal in today's loan marketplace.

The Fastrak Program
The Fastrak Program is a close cousin of the LowDoc, but gets you an answer even quicker, because approved Fastrak lenders do the paperwork themselves and don't have to wait for SBA approval. Though still a pilot program, Fastrak is up and running in many regions.

Caplines
For businesses that need working capital on a short-term or cyclical basis, the SBA has a collection of revolving and non-revolving lines of credit called Caplines. A revolving loan is similar to a credit card, where you carry a balance that goes up or down, depending on payments and amounts borrowed. With non-revolving lines of credit, you borrow a flat amount and pay it off over a set period of time.

Women & Minority Loans
The SBA offers assistance for some would-be entrepreneurs with its Minority and Women's Pre-Qualification Pilot Loan Programs. The women's program uses nonprofit intermediaries, while the Minority program uses both nonprofit and for-profit intermediaries.

For-profit intermediaries may charge more for loan packaging, so this is another good place to shop for deals. Not that you can't get your money's worth--conscientious intermediaries help borrowers develop their applications, then send the paperwork to the SBA, where it is rushed through. Usually within three days, the SBA issues a letter of pre-qualification, and the intermediary helps the borrower shop for the best loan. The maximum amount for these "pre-qual" loans is usually $250,000, although some SBA districts vary the limits on Minority loans.

The Microloan Program
As comprehensive as all that sounds, SBA financing isn't limited to the 7(A) group of loans. Nonprofit intermediaries--that often will walk you through writing your business plan and taking inventory of your business skills--administer the Microloan Program. "Micro" means less than $25,000 and carries a fairly short term, although maturity terms vary, as do interest rates. Microloans take little time to process--often less than a week. The greatest advantage of the microloan is that it can be easier to get a loan from a commercial bank. The only downside is that the Microloan Program isn't available in all regions.

Tips To SBA Success

Hopefully, you'll be approaching the SBA with the much happier prospect of starting or expanding a business. Here are a few tips to assist you in applying for your loan:

• Be polite, be persistent and be prepared.
• Have all your ducks in a row before you go to the bank. The type of paperwork you'll be asked to bring to the bank will vary with the kind of loan you are requesting, but for a start-up you'll probably need to bring a projected cash flow statement, itemized use of proceeds, personal tax returns and, of course, a business plan.
• Be prepared to explain how much money you'll need to borrow and what you'll use it for. The biggest mistake people can make is admitting to the bank they don't know how much money they need.

One of the most valuable aspects of the SBA is that it can help you line up your "ducks." SBA services include many free resources to help you with such tasks as writing a business plan and sharpening your presentation. This type of help, along with the wide array of SBA loans, gives you a good chance of finding the right loan for your business.

Jeffrey Grissler is the vice president of national sales for Neptune, N.J.-based Quest Resources, Inc., (800) 449-0777.