The salon/spa business is a good business to be in. According to industry analysts, profit margins nearly tripled from 2009 to 2014, and revenue is expected to grow at an average annual rate of 3.2%, totaling $58.7 billion by 2019. But with success comes competition. That’s why this same industry forecast predicts the number of industry operators will grow even faster, hitting 1.3 million operators by 2019.Having working capital to invest in your salon can make the difference between whether yours gets on this train or gets left behind. For some salons, a merchant cash advance (MCA) may be a good option to access cash to invest. If your salon’s financial state is a bit precarious, then the MCA might be the program that gets you on the right track to start growing.
WHAT YOUR MERCHANT CASH ADVANCE LOOKS LIKE
Salons/Spas are particularly good candidates for an MCA because so much of your revenue comes in via credit cards. Without a strong stream of credit card sales, you won’t get approved for an MCA. That’s because the MCA lender gets repaid by getting a small percentage off the top of your daily credit card receipts. If your MCA deal has an 8% retrieval rate and you have $1000 in credit card sales that day – your MCA lender will get $80 (1000 x .08).
One of an MCA’s many benefits is that your repayments stay at a fixed percentage of your revenue, so you’re never looking at a monthly payment that takes too big a bite out of your cash flow. Because of this advantage, the amount of cash you can get with an MCA will be tied to your average monthly credit card receipts.
When you think about how much money you need, consider that amount in the context of your average monthly credit card receipts. Let’s say your average monthly credit card revenue is $10,000 and you want $15,000 from your MCA. How long would it take to pay off an MCA with a 10% retrieval rate and a factor rate of 1.2?
An MCA’s factor rate determines how much your cash advance will cost you. In this case, the total amount owed would be $18,000 (15,000 x 1.2). With a 10% retrieval rate, it would take a little more than 22 months, with a $800 repayment per month, to pay off the MCA. Some MCAs will extend out for 24 months, but many will set numbers based on being repaid on a shorter term.
These are all key variables that will help determine how much an MCA lender will provide. So when considering whether an MCA is a good option for your salon, examine what your average monthly credit card receipts have been for the past year in the context to how much cash you want.
HOW ARE YOU GOING TO USE YOUR MERCHANT CASH ADVANCE?
The industry analysis reported that the key differentiators among salons come down to technical expertise and marketing. That makes both these areas good ways to invest your MCA cash.
The report also forecasts that most profit growth will come from increased sales in high volume, high margin products. Selling products take cash for space and inventory. If your salon isn’t yet selling products, investing in a product expansion plan may be a good way to increase the lifetime value of your current client base. Now, instead of needing more clients to grow revenue, you can increase the average revenue value of the clients you already have. That makes your salon more profitable even before having to maintain a growing number of new clients every month.
What you’ll notice about all these options is that they have direct impact on revenue. As you work to determine how much you want from your MCA, run some numbers to figure out what return you expect to get from how you spend it. This will help you frame whether taking the MCA is a good financial choice for your small business.
You may find you want to start with a smaller amount and build off that. That’s another benefit of MCAs. Banks generally won’t make small loans. With an MCA, you can borrow what you need and not more, even if it’s a relatively small amount.
Let’s say you do want to start product sales. You may want an MCA of $5000 to buy inventory that you can display around your reception desk. This may be a good first step to up your revenue per square foot.
As you add your retail sales to your overall credit card receipts, you’ll position yourself to qualify for a larger MCA the next time. In this round, you may now qualify for a $10,000 MCA so you can remodel your reception and waiting areas to expand retail shelf space and by larger quantities of product.
IS THE TIMING RIGHT FOR A MERCHANT CASH ADVANCE?
Salons have some advantages over other small businesses. They tend to weather recessions and economic downturns better than many. People still need to get their hair cut. And much like the lipstick effect, people will always find a little extra to feel good with a blow out or manicure when they have to put off larger expenses.
Even so, some seasons are busier than others. The slower, winter period may be a great time to do some remodeling or start laying the foundation of an inbound marketing strategy. But with the time you get due to less business activity, comes lower revenue. That’s the bind, right?
This is where a Merchant Cash Advance can really be helpful. You can get the working capital now without having to make high repayments right now. (Be sure to share your past credit card receipts that include your busy season so your MCA lender gets the full picture of revenue, not just what you’re doing in the low season.)
So is now the right time for you?