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Is the Bank Your Only Option?
By: Mark E. Battersby
Posted: February 28, 2011, from the March 2011 issue of Skin Inc. magazine.
Usually, well-established spas with good credit records are able to take advantage of affordable financing. For the most part, however, many banks find it more profitable—and safer—to invest funds borrowed from the Federal Reserve System into government securities rather than risk lending to small businesses. Not only are loans often hard to come by, they are also expensive. This slows down economic recovery because businesses that can’t borrow often can’t expand. Therefore, lawmakers have responded with a number of proposed funding programs to boost small-business lending. However, the bank isn’t your only option when it comes to financing your spa. It may be worth your while to look into alternatives such as asset-based loans and local funding.
While they aren’t cheap, asset-based loans are a proven, effective financing strategy that cash-strapped spa owners can employ to meet their short-term cash needs. Why an asset-based loan rather than a traditional, cash-flow loan? The truth be known, asset-based lenders often advance funds when funds from more traditional sources are not available.
In general, commercial finance companies are often willing to lend to businesses that cannot, for various reasons, secure credit from a bank. The credit is secured by assets of the spa, such as receivables, inventory, equipment and sometimes real estate.
Although asset-based lenders usually advance capital more quickly and more readily than banks, they charge more for the higher risks involved. As a rule of thumb, when accounts receivable are used to secure a loan, a spa can expect to get about 75% of the face value of “fresh” invoices. The loan-to-value ratio drops rapidly for older accounts. When inventory is used to secure loans, loan amounts vary widely from about 30–80% of the inventory’s value.
Surprisingly, when thinking of funding outside the box, funding from sources closer to home is often more available and usually less expensive. One of the best sources of assistance—and in many cases funding for some spas—are the many state, regional and local economic development agencies. There are nearly 12,000 economic development groups in the United States with the purpose of providing economic growth and development in the areas they serve. They generally encourage new or expanding businesses to locate in their area or to remain in the area. Even those who are aware of public funding often have misconceptions about who will and will not qualify. Many of these programs are looking for businesses with proven track records. The state, regional and local agencies are willing to help them expand their sales, which in turn will help expand the tax base, as well as increase employment in the area.