Your Cash Questions Answered
You’ve decided to buy a beauty franchise. But you’ve got a couple of unanswered questions about the financial side of owning a franchise in a beauty business:
How can I finance the beauty franchise cost?
What steps should I take to secure financing?
In this article, you’ll find the answers.
Financing options to buy a beauty franchise
There are a lot of options available to a franchisee when it comes to financing their business purchase. You could finance from your own resources ─ such as by releasing your retirement fund, selling underperforming investments, or from savings.
However, many new franchisees borrow to buy a franchise. Using a loan with favorable rates and advantageous terms can make good business sense. A downside to borrowing to buy a business is that many lenders require you to have experience in business before they will lend to you.
The sources of finance (apart from your own money, as we’ve touched on above) include:
One of the most common funding sources to purchase a franchise is in-house funding from the franchisor. You’ll be able to get started with less capital, and, because the franchisor has accepted you as a franchisee, there is a lot of experience about the ability of the business to support and repay the loan.
In the past, people used to rely on banks for loans. But now, with the advent of online lenders, it has become easier to get a loan. Lenders like Lending Club and Prosper provide loans for people who want to buy a franchise business. While the rates for these loans have generally been higher than for traditional bank loans, with more lenders coming to the online market competition is driving rates lower.
This is a popular way of financing a beauty franchise business, though it’s not always the best.
There are many lenders who offer loans for the purchase of franchised businesses. The loan amount and interest rates will depend on the type of franchise you buy, your credit score, and your business experience. You will also need to provide collateral to secure the loan.
SBA loans to buy a franchise are easier to get than many other types of loans, and often they are also cheaper. You’ll need a good credit score and a credible business plan.
You may decide to finance your business in partnership with a friend or acquaintance, or a silent partner. Whichever it is, you’ll need to set the ground rules before your partner provides finance. You’ll need to set boundaries and ensure you both understand your responsibilities.
You’ll need to draw up a legal agreement (never enter into a partnership with a ‘shake of the hand’) and be wary that the partner may want their money out before you are ready to repay it.
If you find yourself short of the cash needed to buy your beauty franchise, then you might be tempted to use a credit card to make good on the shortfall. Providing you are certain to pay this off very quickly, it is an option. However, you know as well as I that credit card debt is an expensive way to finance any purchase, so you should think long and hard before going down this route ─ and avoid it.
6 Steps to finance your franchise in the beauty business
Here are the six steps to take to finance your business:
Step #1: Go to the franchisor’s website and review its financial requirements, including cash-on-hand requirements
When you are ready to apply for franchise funding, visit the franchisor’s website and get acquainted with the financial requirements from its franchisees before you submit your application. Does the franchisor offer financing? What are the terms and conditions? How much collateral or free money do you need?
Step #2: Reach out to the franchisor about in-house financing for franchisees
Now, speak to the franchisor and ask about their financing options. If you’re a good match for their business, they will be keen to have you on board. Confirm terms and conditions, and make sure you are comfortable with the arrangement.
Step #3: If in-house financing isn’t available, look for online loans, bank loans, and SBA loans to help meet the estimated opening costs
If the finances are not available in-house, it is important to look for alternative financing options. Now is the time to start searching for alternative financing options ─ online loans, bank business loans, and SBA loans.
Make a list detailing each lender and loan arrangement offered.
Step #4: Compare lenders based on amounts, interest rates, and what types of personal and business credit history they accept
Compare the details you have compiled on your list of lenders. These should include the amount you wish to borrow, the loan interest rate, the credit history requirements, and the amount of collateral you will need to provide.
When choosing a lender, it’s important to consider the amount you want to borrow, the interest rate, and what types of credit history they accept.
Step #5: Once you settle on a lender, gather all required documents, including account statements and assets
Now you have settled on a lender, gather all the supporting documentation that is needed. This may include ID, your business plan, and proof of assets and liabilities, such as your house, cash in bank, investments, and existing debt arrangements.
Step #6: Apply for financing online or in-person as required by the lender
A lender will make a decision about whether they want to give you the loan based on the information that you provide. A word of warning: there is no mileage in exaggerating assets and understating liabilities ─ doing so will come back to haunt you.
How much does the average beauty franchise cost?
The million-dollar question, and one that does not have a straightforward answer.
There are many diverse types of beauty franchises. Each is unique ─ with its own business model, cost structure, initial and ongoing fees, equipment and supplies agreements, business reputation, and so on. For these reasons, franchises in this space can be bought for as little as around $100k. They can also cost millions of dollars.
The good news here is that there is a beauty franchise to suit your passion, your experience, and your budget. How do you get started? Take our franchise assessment – it takes less than five minutes, and you’ll be stunned by how much information it provides.