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SBA 504 Loans for Nail Salons: Everything You Need to Know

The nail salon and the overall beauty industry is predicted to grow to $ 800 billion in the next 7 years. SBA 504 loans are particularly beneficial to nail salons. They assist the business people to purchase property or machinery to boost the revenue possibility. These loans are very cheap since they attract relatively low interest rates. They also offer long terms to their borrowers to repay their loans.

by | Jun 8, 2024

SBA 504 Loans for Nail Salons: Everything You Need to Know

Understanding Loan-to-Value Ratio in ABL

The nail salon and the overall beauty industry is predicted to grow to $ 800 billion in the next 7 years. SBA 504 loans are particularly beneficial to nail salons. They assist the business people to purchase property or machinery to boost the revenue possibility. These loans are very cheap since they attract relatively low interest rates. They also offer long terms to their borrowers to repay their loans.

SBA 504 loans offer an opportunity to those nail salons that would like to expand. This type of loan may afford to finance up to 90 percent of the cost. Nail salons are known to be very popular businesses as well as sources of good income.

One of the biggest problems many salon businesses face is high rent costs. In essence, owning their space is likely to make them cut on costs. This can be made possible by SBA 504 loans. 

What is an SBA 504 Loan? 

SBA 504 loan is a type of loan that is guaranteed by the government of the United States of America. It is for small businesses. The loan is provided for purchasing real estate or equipment. The loan is facilitated through the SBA in partnership with local lending institutions. 

The loan has two components. One of the part is from the bank or credit union. This part provides 50% of the cost. The other part is got from a Certified Development Company (CDC). This covers 40 percent of the cost. The business owner makes the remaining 10% contribution.

Interest rates for SBA 504 loans are still relatively low compared to conventional loans. They are normally less than 5%. The loan period is typically offered in 10 year tranches, but can be 20 or 25 years as well. This makes the payments per month reasonable.

Benefits for Nail Salons

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To sum up, the opportunities that SBA 504 loans provide are really valuable for nail salons. They can assist the salons to finance their own premises. This can be done to save money on rent. It also has the advantage of affording the owners more control over their businesses.

Nail salons can also use the loan to purchase equipment. This includes nail stations and chairs, polish racks, and holders, etc. New equipment is one of the ways that can be used to attract more customers to fix their nails. It can also enhance service delivery quality.

The SBA 504 loan option means that nail salons can grow. They could open more stations or employ more people. This can help them get higher revenue. Proud ownership of the property also enhances the salon’s value.

Loan Requirements

There are some conditions for SBA 504 loans. The nail salon has to be a commercial enterprise, and not a non-profit organisation. The salon must be situated within the United States. The salon must also be approved as a small business according to SBA standards. This often translates to a figure of less than fifteen million dollars in total assets.

Employment has to be either generated or sustained by the business. Each $ 75000 loan must be used to create or sustain one job. If the salon is located in a rural area, then it is $85,000 per job. The borrowed funds can be used only for acquiring fixed assets. This includes fixed assets such as commercial real estate and various kinds of equipment.

The business owner has to come up with at least 10% of the total cost of the project. This shows commitment. Working capital cannot in any way be funded by the loan. It also cannot be used for investment purposes such as inventory or to repay a debt.

Debt to Equity Ratio

Nail salons must conform to SBA size standards which one can determine by using debt to equity ratio.

Debt to equity = Total Liabilities/Total Equity

Benefits of Opting for ABL Loans

If a salon has $200,000 in assets and $150,000 in liabilities, the DTE ratio is

Debt to Equity Ratio=Total Equity/ Total Liabilities​=150,000/ 50,000​= 3

One drawback of a high debt-to-equity ratio is that the company might be considered financially risky, which could make it complicated to access SBA 504 loans.

Repayment Terms

SBA 504 loans come with favorable interest rates and lengthy terms meaning affordable monthly instalments.  

If the salon takes a $ 500,000 loan with a 4.2 % interest over 20 years,  their monthly payment would be

Monthly Payment=P×r×(1+r)n / (1+r)n−1​ 

Where:

P= loan amount

R= monthly interest rate = annual interest rate divided by 12

N = total number of payments

Monthly Payment=1500,000×0.0035×(1+0.0035) 240 ​ /  (1+0.0035) 240 -1=2,081

How to Apply

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SBA 504 loan application process is time-consuming. First, choose a bank with offices in your region. This can be a bank or credit union. They will proceed with the loan through a CDC. The lending institution will then determine the health of the business.

Prepare financial documents. This entails tax returns and statements of income and expenditure. A business plan will also be of importance to the lender. This should demonstrate how the loan shall benefit the salon in terms of expansion.

The application process may last for several weeks. Be patient. Both the SBA and CDC will scrutinize the application. When they are approved, the funds will be disbursed.

Real-Life Examples

A number of nail salons have been able to receive SBA 504 loans. For instance, a salon in New York used the loan to acquire its building. This helped to cut down on rent expenses by $5,000 monthly. The salon was then able to save more money and hire two new employees.

In California, a nail salon purchased new equipment with help from an SBA 504 loan. They also added six new nail stations. This increases their revenues by 30%. The salon also raised the average customer satisfaction level. 

In Texas, a salon increased in size with the help of an SBA 504 loan. They also expanded by opening a new branch. This doubled their customer base. According to the salon owner, getting the loan transformed everything for him.

SBA 504 Loan Trends 

SBA 504 loans are a popular option. By the end of 2023, more than 5,000 loans had been approved, with a total worth of $5 billion and an average size of one million dollars. These loans are frequently used by small businesses in the hair and beauty sector.

SBA 504 loans have relatively lower interest rates. The rate of increase in May 2024 was 4.2%, which is still lower than the commercial loan interest rates. Loan terms are extended. All loans are for 20 years in term. 

Today, SBA 504 loans are issued to nail art extensively. This industry is on the rise. Globally, it is predicted to hit $800 billion by the year 2025. SBA 504 loans have been reported to be widely embraced by many nail salons.

Exploring Alternative Financing Options

Factoring vs Tangible Assets

If traditional SBA 504 loans are hard to get, nail salon owners may consider the following financing strategies. These can offer the needed capital to expand and operate their businesses when it is almost impossible to secure conventional loans. Here are some other business financing methods, their benefits and disadvantages. 

Microloans

Microloans are small credit products that are issued by nonprofit organizations and community-based financial institutions for the most part. These are intended to help small-scale enterprises that may not access conventional loans from commercial banks.

Benefits of Microloans 

Accessibility: It is more accessible for companies that do not have a long credit history or for those companies that are located in areas which are not covered by the usual financial institutions.

Amount and Terms: Microloans, in general, vary between $500 and $50,000. The terms are relatively short and can be from half a year to five years.

Support Services: Most microloan programs provide other related services including organization advice and guidance.

Peer-to-Peer Lending

PhotoReal Nail Salon Success with SBA Financing Options 5

P2P lending refers to the market through which borrowers access funds from many individual investors without the use of middlemen. Such lending has become quite widespread because of its availability and relatively fast approval.

Benefits of P2P Loans

Speed: P2P loans can be approved, and the funds can be released faster than in the case of conventional loans.

Flexibility: Some of these platforms do not have stringent credit checks as compared to other traditional platforms.

Variety of Terms: It is also flexible to provide different loan amounts and terms that borrowers can take depending on their requirements.

Merchant Cash Advances

Businesses receive cash upfront in return for repaying the merchant cash advance at a higher rate than their future credit card receipts. This may prove especially valuable for companies that process a large amount of credit card payments.

Benefits of MCAs:

No Fixed Payments: Repayment is on a daily basis as a percentage of credit card sales and offers a good way of dealing with cash flow.

Fast Funding: MCAs can be approved and funded within a short time, in some cases within several days.

No Collateral Required: Businesses do not need to provide conventional collateral for MCAs, which makes them even more attainable.

Conclusion 

Numerous nail salons have expanded their enterprises with the help of SBA 504 loans. They have been able to spend less on rent and purchase new equipment, which has enhanced their revenue base and customer satisfaction.

Talk to our experts to learn more about the possibilities of nail salon financing with SBA 7(A) loans. Flaney Capital helps borrowers through the application process and connects them to low-interest borrowers. Call us today at 1-888-822-0844.

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Are you ready to take your business to new heights? Discover the power of the SBA Business Industry Program. With its comprehensive eligibility criteria, underwriting requirements, and loan guarantees, this program provides accessible and affordable loan options for businesses in rural areas.

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FAQ

Here are some answers to Frequently Asked Questions.

What are the main advantages of ABL loans?
ABL loans allow companies to use their existing assets as collateral for financing, providing greater flexibility than traditional lending methods.
Are there any risks associated with ABL loans?
Yes, if a business cannot repay its loan, the lender may seize the assets used as collateral. Businesses need to understand this risk before opting for an ABL loan.
How does accounts receivable factoring work for ABL loans?
In accounts receivable factoring within the context of ABL loans, a business sells its outstanding invoices (accounts receivable) at a discount to obtain immediate cash.
What is involved in the due diligence process for obtaining an ABL loan?
The due diligence process typically involves assessing a company’s financial health, including reviewing its balance sheet, income statement, and cash flow statement, among other things.
Can all types of companies apply for an ABL loan?
While any company can apply for an ABL loan, it is particularly beneficial for those with a high volume of accounts receivable or significant tangible assets.