Making the decision to become a franchisee is incredibly exciting, especially when you align with the franchise brand’s culture, values and vision for growth. However, one of the most important initial steps you take while doing your due diligence is determining how much you’re willing to spend on opening a franchise, as well as how you’re planning on financing your first business. Here is our step-by-step guide for you to consider as you decide how to finance your children’s hair salon franchise:
1. What is the Best Financing Option for You?
Financing your business can come in many various forms, but you need to understand their differences and choose the best option for you. You also take into account what costs will be for starting up and maintaining your children’s hair salon. Upon signing your franchise agreement, you’ll be required to pay a franchise fee.
In most cases, this fee ranges from $20,000 -$50,000, depending on the brand and type of agreement. This money goes straight to the franchisor and gets you access to business systems and manuals, trade dress and other resources and tools you’ll need to successfully open your salon.
The variety of funding options for business owners helps ensure that potential franchisees can still open and operate their businesses without carrying overwhelming financial burdens – and it’s up to you to find the best fit for your budget, goals and franchise costs.
Funding options lay in four main categories: equity funding, self-funding, debt funding and asset-backed funding. Here’s a closer look at each:
Equity funding includes examples like angel investors and venture capital. Angel investors are family, friends and people who see the potential in your business dreams and want to support you on your journey.
Many times, angel investors assist you when other investors aren’t interested. Typically, these individuals have the cash to spare, but are also looking for a higher return on their investment – usually at least around 25 percent. Angel investors are a great way to bridge the gap between venture capital and support from friends and family.
Self-funding is pretty self-explanatory – you provide the funds from personal cash savings and/or a 401(k) or IRA investment plan. If you plan on taking funds from your 402(k) or IRA plan, make sure to read the rules and guidelines for doing so before withdrawing the amount you need.
Debt funding provides a wide array of options, from credit cards to bank and home equity loans. Bank loans, like Small Business Loans (SBA), are guaranteed up to 90 percent by the SBA and are a relatively straight-forward process. Currently, the financial landscape provides great opportunity for business owners, with historically low interest rates. SBA 7(a) loans are currently at a prime rate of 3.25 percent – making it an advantageous move to invest in a franchise business.
Last but not least, we have asset-backed funding. Asset-backed funding includes options like equipment leasing and security-backed financing. Many times, franchisors may have financing plans and arrangements with leasing companies for equipment necessary to run the franchise. This can be a significant factor when seeking financing options, since equipment often makes up between 25 and 75 percent of a franchise’s total start-up costs. If a franchise does not offer equipment leasing to its franchisees, there are non-franchise and non-bank companies that specialize in equipment leasing to franchisees.
Another option under asset-backed funding is through assets, stocks, bonds and mutual funds to secure a loan. However, make sure that these assets and mutual funds are not attached to a qualified plan, like an IRA profit-sharing plan.
2. Understand Your Business Inside and Out
For those choosing to get a bank or home equity loan, there are some essential questions you need to answer to successfully apply for a loan. For example, you should know:
- The peak season for your children’s hair salon – if there is one
- Your credit score
- How much time you need to pay back your loan
- How much money you’re asking for
These are just a sample of the questions you need to answer before you dive into the world of loan applications. A business plan will help you establish a well-constructed document that will assist you in securing financing – click here for a detailed review of creating a children’s hair salon business plan.
3. What are the Start-Up Costs and What Does Your Franchisor Offer?
Understanding the costs that will go into creating and opening your business is essential when deciding on financing options. From site selection and real estate to furnishings and equipment, costs can add up quickly and become overwhelming.
When a new franchisee signs their agreement with us, we understand that costs can be daunting, so we try to ensure that real estate and construction costs are as affordable as possible – typically ranging from $15,000 to $90,000. Prices will depend on the location, size of the space, condition and the local market, but our corporate team does extensive comparative research so you’re getting the best price.
Additionally, Pigtails & Crewcuts franchisees typically pay from $18,000 to $27,000 for supplies and equipment, but we help you by offering a variety of site layouts and deliver supplies and equipment to you, making it a true turnkey solution.
The decision to invest in your first children’s hair salon franchise is a big deal, and having the right information at your fingertips can assist you in making the right financial funding option that will pave the way to your entrepreneurial goals and success.