Why Leasing May Be The Answer
A Look At Leasing vs. Conventional Financing
by Jeffrey Grissler
It seems Murphy's Law always strikes halfway through a project. The architect informs you the electric isn't adequate or the plumbing is too old to be repaired. The interior designer tells you the tile you ordered has been discontinued, but for three times the cost it can be imported from some distant place you have never heard of.
Even if you received a bank loan, going back to the money well multiple times is not an option. Commercial banks always have viewed our industry as a high-risk cash industry. By nature, banks are very conservative. Most banks feel the risk is so high they will not even return the calls of a small businessperson inquiring about a loan. Banks prefer larger 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 prove themselves as successful businesses. Salons with fewer than three years of history are considered startups by bankers and stand little chance of obtaining a business 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 some industry and business background.
The fact is you will not be able to get a loan unless you show documented adequate income to repay the loan, 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--one 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 of 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 developing a business.
Most leasing companies have programs in place to finance as much as $75,000 just by filling out an application. Guidelines include two years under current ownership, $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. With a bank, they 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?
Jeffrey Grissler is the vice president of national sales for Neptune, N.J.-based Quest Resources, Inc.
