Opening a Beauty Business: Initial Investment

December 1, 2015

Deciding upon the best way to finance your shop or salon depends on a few factors, you must consider and take into account:

  • How much money you will need to start up the business.
  • What your business is currently making, or if you’re a brand new business.
  • Whether you are willing to offer personal assets as security – this can make it easier to get funding, but obviously has its risks if you’re unable to maintain payments in the future.
  • Whether you own a business property, as this too can make it easier to get funding.
  • Whether you are willing (and able) to sell shares in the company.

Funding Your Beauty Business Startup

Once you’ve considered these options, there are a variety of ways you can attain money to start your health and beauty business:

Investment Finance

Investment finance, or equity finance, is the process of selling a portion of your business (i.e. ‘shares’) to an investor. This means that the investor inherits that same portion of the business’ profits or deficits.

Could you secure investment finance, a la Dragons' Den

Pros

  • Depending upon the investor, they could bring in skills or contacts that will help your salon grow as a business.
  • You don’t have to make repayments or pay interest like you would with a loan.
  • The risks of the business are shared with your investor.

Cons

  • The process can be demanding, time-consuming, and ultimately expensive.
  • You will only own a share of your shop or salon, rather than the whole business (though your share could well be worth more money if your business succeeds in the future).
  • You could possibly have to consult your investor before being able to make certain management decisions, this would depend upon the role your investor decided to take in the business though.
  • You must be registered as a limited company in order to sell shares; you cannot raise money in this way if you are a sole-trader or in a partnership.

Crowdfunding

Crowdfunding involves showcasing an idea for a product or business, usually through a crowdfunding website, to give people the opportunity of investing, lending or contributing smaller amounts of money to your business or idea. The money is then pooled with the goal of reaching your funding target.

Is crowdfunding the right option for your beauty business startup?

Pros

  • Is an alternative to loans or equity finance where you don’t have to pay interest, and may not have to sacrifice part of your business.
  • It’s possible to raise finance fairly quickly, often without having to pay upfront fees.
  • It also serves to raise awareness of your new business.

Cons

  • If the target you set isn’t met, money is usually refunded to those who have already invested.
  • Ideas can be stolen or copied if you haven’t used patents to protect them.
  • A salon or spa is very unlikely to win funding in this manner.

Loans

Loans come in all shapes and sizes, and from many different sources – what they have in common though, is that they are a sum of money, leant and repaid over an agreed timescale, usually with interest added to the original amount. Loans can come from banks, CDFIs (community development finance institutions), friends or family, and even other businesses sometimes offer businesses loans.

 

As well as repaying the amount you’ve borrowed, you normally have to pay interest on a loan. The amount will depend on:

  • What period you are borrowing over.
  • The amount borrowed.
  • Whether or not the loan is ‘secured’. This is when you use your personal property as ‘collateral’ against the money borrowed. (With the understanding that, if payments are not met, the aforementioned property is seized by the bank).
  • Other factors, like the Bank of England base rate.

Is a loan the right option for your beauty business startup?

The interest rate of your loan can be:

  • Fixed, meaning that it won’t change for the duration of the loan.
  • Variable, meaning that it will change with the Bank of England base rate or the bank’s cost of borrowing.

Loans are a viable option if you need to obtain funding for assets (salon chairs, treatment tables, computers etc.), start-up capital, or instances where the amount of money you need won’t change. You should never take out a loan for ongoing expenses, you are far more likely to fall behind with payments by doing so.

Pros

  • You don’t have to give the lender a share of your company or profits.
  • You can tie loans to the lifetime of the equipment you are borrowing the money to purchase.
  • You are guaranteed the money for the length of the loan (usually 3-10 years) unlike with overdrafts, where the amount is payable on demand.

Cons

  • If the loan has a variable interest rate, your payment amounts can change, making it more difficult to budget.
  • Drops in your monthly business may affect your ability to make your monthly loan payments.
  • Loans aren’t very flexible, in that, if you wish to pay the balance at an earlier date, charges can be applied.
  • If your loan is secured against property or assets, you could lose these if payments are not met.

Grants

A grant is a sum of money awarded to an individual or business for a specific project or purpose. You can apply for a grant from charities, your local council, the government, and the European Union.

Grants do not have to be paid back, but there is a lot of competition for them, and they are almost always awarded for a specific purpose or project.

Could you get a grant for your beauty business startup?

Pros

  • Not only do you not pay interest, you don’t pay back at all.
  • You don’t have to give up shares or profit from your business.

Cons

  • The application process is generally very time-consuming.
  • Grants are generally awarded to proposed projects and businesses, rather than existing ones.
  • There is an extremely large amount of competition for grants.
  • Grants generally only cover part of the costs of a business or project, meaning you would still need to raise the rest of the money yourself.
  • You have to find a grant that suits your specific project, which can be extremely difficult.

Overdrafts

An overdraft is a credit facility that you agree with your bank. It enables you to temporarily spend more money than you have in your account, in order to cover short-term financing needs.
An overdraft ought not to be used as a long-term source of finance. Using an overdraft persistently is likely to make your bank question whether you may be in financial difficulty.
You will need to agree an overdraft limit with your bank. Generally you will be charged interest on any money that you use, and you may also incur fees.

Could an overdraft be the right choice for your beauty business startup?

Pros

  • Quick and easy to arrange.
  • Cheaper and more flexible than a loan.
  • There normally aren’t any charges for paying it off early.

Cons

  • The bank can ask for the money back, in full, at any time.
  • Charges are usually added if you go over your overdraft limit.
  • There is generally a charge for extending an overdraft.
  • Your overdraft has to be with the bank that you have your business account with.

Leasing and Asset Finance

Renting or leasing equipment or machinery is a great way of affording resources that you more than likely wouldn’t have been able to pay for outright.

Could leasing and asset finance work for your beauty business startup?

Pros

  • Gives you access to a high standard of equipment that you may have been unable to afford.
  • Usually tied to fixed rate finance.
  • Slightly less risky than a secured bank loan. In that, if you cannot make payments, you will lose the asset, but not property that you already own.
  • The company leasing the item(s) to you carry the risks and costs incurred if equipment breaks down.
  • Provided that you make regular repayments for the period of the lease, the agreement cannot be cancelled.
  • Asset finance is widely available.

Cons

  • Likely to be more expensive than buying the item(s) for cash.
  • Long-term contracts can sometimes be difficult to cancel early.
  • You may have to pay a deposit on some items.
  • You cannot claim capital allowances if the lease is under 5 years (or even 7 in some cases).

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