So You Want to Own a Tanning Salon
What a lender is looking for in today's market
by Hollie Costello
For those already in the indoor tanning industry, starting and managing a tanning salon may seem like old hat. Many in the business have worked their way from one eight-bed salon to two or three 20-bed salons in an area where tanning is booming, starting over time and time again with a comfort that only knowledge and experience can provide. However, most of those in the industry would not have been able to get started was it not for the kindness of strangers. Strangers in the banking industry, that is, for a loan officer can be an entrepreneur's best friend or worst nightmare depending on how knowledgeable, prepared and invested a business person is in their dream.
The First Line of Defense
For anyone trying to start a business, money is a key objective as well as the biggest obstacle from the beginning. Those who have the money to start a business without financial help are in good shape; however, most people starting a business--especially a tanning salon--will need some kind of help.
According to Chuck Robinson, a former banker and current Chief Executive Officer of Four Seasons Sales and Service, the first thing anyone interested in the indoor tanning industry should do is research.
"You have to be prepared to answer the questions a loan officer will ask," Robinson says. "Talking with manufacturers and distributors is an entrepreneur's best bet when trying to get an idea on what owning a tanning salon entails."
Robinson says most manufacturers and distributors, including Four Seasons, work with prospective owners to outline a business plan, as well as design actual blueprints and investigate potential customer demographics. Creating a satisfying relationship between the new owner and the distributor is in everyone's best interest, for the current and future success of the business.
Business plans are an important step in the health of any business. According to information from SUN Ergoline, a business plan includes location information, customer demographics and space considerations, as well as a return of investment strategy and a break-even analysis of the location.
From the planning stages, potential owners have to cover five basic areas that a loan officer will be looking at when considering approval of a loan. Those five areas, covered more extensively in this article, are: identity profile, financial position in progress, repayment capacity, purpose for loan and collateral.
Know Your Identity
According to Robinson, most people do not realize how important personal information is to a loan officer. In addition to the usual background questions (name, rank and serial number, please), the loan officer wants to know how you came up with the business idea you are now trying to cover and why you choose to move in that direction. Experience, both in your current job and in your future business venture, will come up in conversation.
Know what you are about, Robinson says. Be able to answer the question, "Who is the person standing behind this business?" Corporate loans, taken out by already established salons that are looking to expand into a second business, are a little more in-depth. Not only does the loan officer need to know about the corporation, but they may also request information on those requesting the finances.
With a borrower profile already in hand, those seeking a loan can provide the interviewer the information needed in a relatively easy manner. In addition to taking the pressure off a loan officer, it takes the pressure off the borrower, as well.
An individual's integrity and past behavior also come into play when doing an identity profile. While credit checks and past business failures may seem daunting, do not discount simple personal interviews. Loan officers can learn a lot with a few well-placed questions and a few befuddled or unclear answers.
In the end, the careers you have held and the jobs you have worked may come into play much more than a past credit history. Without management skills of some kind, including people skills, most loan officers will be wary about lending money. Management skills, both educated and school-of-hard-knocks, mean a lot to a person who is looking to lend money. Management skills are the difference between being paid back by a well run salon or being paid back through an "all-things-must-go" liquidation sale.
A Position of Progress
Finances, of course, are going to be very important as well. Loans are not given without credit checks, financial statements and all around good money-making potential. Having a balance sheet, or a financial snap shot, of you and your past business ventures is a lot like knowing your identity.
Financial officers do not feel comfortable giving loans to those who know nothing about their current or past finances. Have a financial "position in progress" sheet done that will not only explain where you currently are, but also where you hope to be in the future with the help of the loan.
According to Robinson, it is important to show past management skills as well. How a person got to be successful enough to look into owning a business is an important part of the interview.
"You do not want to show a lack of management skills," says Robinson. "Include a description of how the company will look in the future so the loan officer knows you have a plan of action."
In addition, make sure to have current records of all your previous business ventures--successes and failures. Hiding information that may come out in a background check shows lack of integrity--not a personality trait appealing to people who lend money.
Linc Reeder, commercial loan officer for the Business Development Financial Corp. in Phoenix, says it is also important to know the business from which you are requesting the loan. Have all applications filled out, all the information they require ready and know who you will be speaking with--learn some of the lending institution's past history.
"If they are not open to loaning to small businesses, why waste time trying to be the first?" asks Reeder. "It is better for everyone if you go to the source of the loan and ask what they want from you before asking to see a loan officer."
Reeder also says a generic business plan--including the who, what, when, where and why--is important as is information on competition, staff potential, sales and expense sheets and market demographics.
"Most lenders are eager to loan money to sound ideas and institutions," Reeder says. "Even if they find one part of a plan unacceptable, if they are a good loan officer, they will try to work with you on fulfilling your dream."
For most lenders nothing is more important than the person's repayment capabilities--how and when will the loan be reimbursed to the bank? According to Robinson, most lenders look at two options when deciding if a new business venture is a sound business venture.
Current earning ability and the loan request are two of the most important aspects of a customer and company profile. If the customer cannot present a sound current earning ability, the loan officer may look at other sources that are more sound in the same area of expertise. Though management skills and personal integrity count for a lot during the loan process, nothing will help if the loan officer believes the customer will have a hard time paying back the money in a timely fashion.
"Cash goes out the door and cash has to come back in," says Robinson. "Either through earnings or liquidation."
Contrary to popular belief, most lenders do not enjoy liquidation of any kind. It does not look good for the business and it does not look good for the banking institution. Therefore, the amount of the loan also is a large consideration for the lender. They may believe the loan request is unrealistic and work with the entrepreneur to adjust the repayment ability or the request to better serve both parties.
Do You Have a Purpose?
Both lenders (or former lenders, as the case may be) say the parties must know what the purpose of the loan is. That does not mean telling the loan officer, "I want to open a tanning salon." That means actual information on the future of the business. Be specific about the plans that you have in place.
Information on the amount of beds, the kind of lamps you will use, the kind of accessories and products you will offer may seem extraneous when looking for a loan; however, they also show that you have thought things through--that you have plans for the money.
"For a true, top-of-the-line salon, you are looking at $13,000 to $14,000 per bed, which covers both the purchase of the beds and the common area," Robinson says. "However, banks usually will not lend money for the build-out--which almost all salons are looking to do when they move into a new building."
Tanning salons are a tricky business in that they usually are renting space within a strip mall or business and they often need to put in walls--either real or moveable--to create the room space that is needed for the layout.
Robinson says usually 50 percent to 60 percent of the cost of a salon is associated with purchasing equipment--a figure loan officers like to see. That means they can recoup a large part of their cost in cases of liquidation. He also says that loan officers often will pay up to 75 cents on the $1 for equipment cost--making it necessary for the entrepreneur to cover 25 percent of the equipment cost. However, with more than 40 percent involved in build-out, most salons find they need another source of funding because banking institutions rarely will pay for build-out costs. That is why the last, most important aspect of funding a new business is collateral.
What Is That Bed Worth?
Collateral can come in many forms, from a second mortgage on the house to a trust fund or even a retirement fund. In fact, many lenders look at collateral before they look at the business plan draft.
With a good salon costing upward of $400,000 to start, most banking institutions want to see more than a solid plan and a nice smile. They want to know what you will offer in return if your investment is not sound. Having cash flow numbers and loan structuring is a good idea, but if you are not financially sound, forget about getting a loan.
"You need to satisfy their end of the relationship," says Robinson. "Be prepared to answer questions on where you will get the rest of the money you will need to complete your venture."
Knowing equipment and cost also will install confidence in a lender. Today, like in grade school, doing your homework earns big brownie points. Having industry surveys at your fingertips, with sources and confidants, only can improve the outcome of the loan meeting.
"Know what the financial constraints are to the business," Robinson says. "Having a 5-year plan installs a sense of security in their investment and shows good management skills."
Knowledge Means Money
Most important to any interview, as well as the easiest part, is to be yourself. Do not offer unnecessary information, but do not withhold information that is requested. Know how much you are asking for and where all the money will be used, now and in the future. Be ready with a plan of attack for your business--show business savvy that proves you are out to be successful. With answers to all the questions at your fingertips and the information to back up your facts and figures, a loan officer has no choice but to start you on your dream of business ownership.
Insurance and the Business Loan
Applying for a loan to acquire, build or remodel a tanning salon may seem like an overly complicated process, however it is really quite simple when looked at from a lender's point of view.
A bank, or other lending institution, makes a loan based upon the expectation that it will be repaid with interest. It is easy to understand why potential owners probably will be required to show proof of insurance in order to protect the lender's financial risk prior to getting a loan.
Fortunately, the insurance requirements of most lending institutions are fairly easy to meet. Those requesting the funding will be required to carry "special form" coverage for a tanning salon, which includes coverage against covered causes of loss such as fire, theft, wind, etc.
Some lending institutions may require that they be named as a loss payee, or an additional insured, on the insurance policy. It also is helpful to choose a carrier that can provide same-day proof of insurance to minimize any delay in having a loan approved.
As a responsible tanning salon owner, adequate insurance protection should include three major types of coverage--property insurance, business interruption insurance and business liability.
It is important to show a lending institution that not only do you have the coverage required for a business but also you understand the coverage you require. Lendors need to feel secure in the business and management skills of the requesting party before they will even consider the size of a loan.