Crunching The Numbers

Crunching The Numbers
Understanding Bank Loans And Equipment Leases

by Terri Franssen

Recently, we had to turn down several tanning salons’ lease applications because their personal-debt-to-income ratios— according to their personal credit bureaus— were too high. Apparently, they used a Small Business Administration (SBA) loan through their local bank when they started their salons and hadn’t completed the terms. Additionally, they purchased their lotions and salon supplies during the peak season using credit cards.

Fees associated with bank loans, in and of themselves, often include an amount greater than 3 percent of the interest rate of a salon’s local bank, broker or mortgage loan officer.

Most bank loans require a 25-percent down payment based on the total amount the salon owner is financing. Be sure to question how the 25 percent is applied to the balance or when it is returned.

Banks nationwide, including those that work with the SBA, issue small-business loans for build-out and equipment that salon owners may not realize go directly against their ability to acquire personal credit and include a blanket lien against personal assets.

Usually, the media hype and selling tool of bank loans is so focused on the seemingly low interest rates that it is easy to forget to read the small print on the agreement. Salon owners may be aware that the secured loan takes hold of their current personal assets, but do they read the fine print that says “now and hereafter acquired”?

Most of these loans also state “this agreement cannot be assigned.” Therefore, when a salon owner decides to sell the salon, the salon owner remains personally liable for the loan. Should something happen that causes the business to fail, the salon owner may lose everything he or she has worked to build. This includes the tanning salon and personal items such as the family’s home, family property that a grandparent entrusted in an inheritance, etc. It’s all been given to the bank because the business did not succeed.

Fees, inability to assign and blanket lien against personal assets can cause the interest rate to become greater than the loan officer may have led the salon owner to believe at the beginning of the loan. Therefore, as the loan is based on a person’s personal credit, affects personal credit and uses personal assets in securing the loan, it is recommended that a minimal amount of financing be secured by the normal lending resources of a local bank.

Fees associated with leasing may vary from company to company, and it is very important to ask good questions before signing a lease. Normal leasing fees range anywhere from $150 to $750, depending on the leasing company.

Leases typically have a $1 purchase option, 10 percent PUT (limiting the purchase price at the end to 10 percent of the initial cost) or fair market value. Be very careful about signing documents, become educated and ask good questions to ensure that other fees aren’t tacked on to the payment and continued billing isn’t assessed at the end of the lease. Research the company’s business practices to find out how its programs and fees have affected others.

Leasing usually requires a small payment up front. For example, two payments up front on a 60-month term should give a salon owner 58 months to pay for the equipment, adding only the purchase option he or she selected to the end of the lease.

A commercial equipment lease should be collateralized by the equipment a salon owner is purchasing, and the salon owner’s personal credit is minimally affected (usually 3-point reduction), which indicates the individual’s practice of paying bills on time.

If the salon owner decides to sell the company, it’s important to allow the leasing company to qualify the new owner in order to remove the old owner as the responsible party. A lease typically should not affect the ownership of other assets, therefore reducing liabilities on other assets.

Normal leasing rates range between 10 percent and 12.5 percent or greater. It is essential to understand the process before acquiring a lease from any company because of potential misleading information.

Salon owners need to do their homework with every aspect of making a business purchase—no matter how they decide to finance the company. Minimal down and small monthly payments will increase a salon’s cash on hand and allow the salon owner to effectively operate his or her business in order to pay for day-today necessities.

Do not use personal credit lines to operate a business and never use credit cards to purchase salon accessories. Use banks to secure monies only when it is absolutely necessary, and allow the equipment to pay for itself through other means such as leasing.

Terri Franssen is Vice President of Vendor and Financial Development of Highline Capital Corp., a Boulder, Colo.- based equipment leasing and finance company serving the indoor tanning industry. Terri has been involved in the indoor tanning industry since 1994 and faced many of the same challenges salon owners faced when securing adequate financing.