Starting a salon vs purchasing one
The SBA treats the two very differently, and the difference is how your cash flow is tested.[1]
- Starting a salon (open one year or less) is a start-up. There is no history to test, so the lender reads your projections. You need 10% of everything it takes to open: build-out, stations and chairs, opening product, deposits and working capital.
- Purchasing a salon for sale is a change of ownership. A first-time owner's deal is an Initial Acquisition: 10% equity that can't be waived, and the seller's past results must show 1.25 coverage. Your plans to grow the salon after closing don't count.
- Adding a second shop can be a Business Expansion at a lower 1.15 floor, if your salon has two full fiscal years under its current ownership and purchases 100% of the other company's stock or membership interests in the same four-digit industry group. Barber shops, beauty salons, nail salons and services such as waxing all sit in group 8121. In the books, a hair salon purchases the barbershop next door and a nail salon purchases a waxing studio.
One rule applies to every path. Every owner, down to a 1% share, must be a U.S. citizen or U.S. national whose home is in the U.S. A green-card holder can't own any share of the business, but can work in it. Your staff don't have to be citizens. In the nail salon book, Brooke and her husband planned to own her salon 50/50 until they learned his green card ruled that out, so she owns 100%.
The size limit is $9.5 million in average annual receipts for beauty salons and $9.0 million for nail salons, so nearly every salon qualifies.[2]
Booth rental, commission and the SBA's salon rules
The SOP names barber shops, hair salons and nail salons as eligible "regardless of whether they have employees or contract with individuals to provide the services." So a commission salon with stylists or techs on payroll fits, and so does one that pays some techs as contractors.
A separate rule covers businesses that make money by renting space to independent businesses. It names shopping centers, ghost kitchens and "office suites (aka salon suites)." Those are not eligible unless three things all apply: the revenue is membership dues, not rent; nobody gets an assigned space they return to; and the business supplies the equipment. The same rule says a business is fully eligible or fully ineligible, and a space-rental business that mixes rent with membership dues, or offers an assigned-space option, is not eligible.
The SOP never mentions booth or chair rent. A salon where stylists rent chairs on an open floor sits between those two rules, and your lender decides how to read it. Nothing in the SOP says a salon with some booth renters and some commission stylists is ineligible. If chair rent is a large share of the salon's income, ask your lender before you sign a letter of intent whether it sees a salon or a landlord, and how much of the chair rent it will count as cash flow.
Booth renters who want to purchase their salon
An Owner Buyout, with equity your lender may reduce, is open to someone employed by the business for at least 24 months when a single owner sells 100%. The SOP doesn't say whether a booth renter counts as employed. In the hair salon book, Tasha has rented chair four for ten years and is offered the salon for $200,000 (a $250,000 project once closing costs and a cash cushion are added). Her lender reads it as an Initial Acquisition. The salon's reported cash flow of $30,000 against $34,937 of annual payments on a $225,000 loan gives coverage of 0.86, well under 1.25. The largest loan the numbers support is $154,562, so she opens her own salon instead.
Time on the payroll counts too. In the nail salon book, Yesenia has worked in her salon as a W-2 tech for 18 months. Under 24 months, she is a first-time owner in the SBA's eyes, and her purchase is an Initial Acquisition.
Which SBA loan fits a salon
At $350,000 or less, the choice is 7(a) Small, SBA Express or, for very small needs, a Microloan. Larger loans use Standard 7(a). The purchase rules (1.25 coverage, 10% that can't be waived, 10-year term) apply whichever 7(a) program carries the loan.
SBA loan options for a salon build-out or purchase
| Program | Size | What to know |
|---|---|---|
| 7(a) Small | $350,000 or less, term loan | 75% guaranty (85% at $150,000 or less). Start-up: 1.10 coverage within one year of funding, and a miss moves the loan to Standard 7(a) or Express. No collateral required at $50,000 or less. |
| SBA Express | $500,000 or less | 50% guaranty, processed by the lender under its own authority. Can be a line of credit. For a start-up, equity is left to the lender, while the start-up rule calls for 10% on 7(a) start-ups, so expect to be asked for at least 10%. |
| Standard 7(a) | Over $350,000, up to $5,000,000 | Start-up: 1.15 coverage within two years (from the end of construction for a build-out). Household (global) coverage of at least 1:1. Life insurance when a one-owner business is short on collateral. |
| Microloan | Up to $50,000 | Made by nonprofit intermediaries, not banks. Working capital, supplies, furniture, fixtures and equipment. Must be repaid within 7 years. Build-out or purchase: ask the intermediary. |
Source: SBA SOP 50 10 8.1; 13 CFR 120.707 for Microloans. Lenders and intermediaries can ask for more than these minimums.
The Microloan's seven-year limit comes from federal regulation.[3] A Microloan might fit a salon replacing a few pedicure chairs or adding furniture. At $300,000, a full build-out is far beyond it.
Lines of credit
An SBA Express line can revolve. A Working Capital CAPLine is built for businesses with receivables or inventory to lend against, and a salon paid by card and cash at the chair rarely fits it. A Seasonal CAPLine pays only for the seasonal build-up of receivables and inventory (and in some cases the extra labor that goes with it), and it can't be used to carry a salon through slow months. Finance the purchase itself with a term loan, and ask your lender before planning on any line of credit as part of a purchase.
If you plan to purchase your building later, 504 is the program for real estate. In the hair salon book, Valerie's salon purchases the two-story building both her shops lease, a year after her expansion. Salons are not on the SBA's Special Purpose property list.
Down payment: what counts as your 10%
- Start-up: at least 10% of total project cost on 7(a) Small and Standard 7(a). Your own cash and a gift with a gift letter count. Beauty school, nail school and advanced course tuition do not.
- Purchase, first-time owner: at least 10% of total project cost (price plus closing costs plus working capital), and it can't be reduced or waived.
- Seller notes: count only on full standby, meaning no principal or interest payments for the whole life of the SBA loan, and limited sources like that can cover no more than half of the required 10%.
- Owner Buyout or Business Expansion: 10% (on an Owner Buyout, of the purchase price), and your lender may reduce or waive it if you have enough cash left.
- Price above value: total debt can't exceed the business valuation. Anything you pay above it comes from your equity. A lender orders an independent valuation when the price is over $350,000, and also at or under it when buyer and seller have a close relationship.
Cash flow: the coverage tests
Debt service coverage (DSC) is the business's cash flow divided by its loan payments for the year. Which floor applies depends on the deal.
Coverage floors under SOP 50 10 8.1
| Deal | Business coverage | Household (global) coverage |
|---|---|---|
| Purchase, Initial Acquisition or Owner Buyout | 1.25 on the last fiscal year or a two-year average, historical or adjusted, no projections | 1:1 required |
| Purchase, Business Expansion | 1.15, same basis | 1:1 required |
| Start-up, 7(a) Small | 1.10 within one year of funding | No SOP ratio; your lender's own test |
| Start-up, Standard 7(a) | 1.15 within two years | 1:1 required |
| Start-up, SBA Express | No set ratio; reasonable assurance of repayment | Your lender's own test |
Global coverage adds your household income and personal debts. The SOP sets the 1:1 floor for purchases and Standard 7(a) but no formula, so lenders use their own method.
On a purchase, two rules trip up salon buyers most. First, projections can't carry a purchase over the floor, so a plan to fill empty chairs after closing doesn't count. Second, only income on the seller's tax returns counts. The lender checks those returns against IRS transcripts, so cash the seller says never made the return counts as zero.
Pay attention to whose chair the revenue comes from. In Renee's salon, the founder's own clients brought in $150,000 of the $750,000 in receipts, 20%. The SBA's rules say the founder can't stay on as an employee, so that revenue is at risk, and her lender weighs it.
Collateral: chairs, dryers, the build-out and your home
Salons are light on hard assets, and the SBA discounts what there is. In a purchase, used equipment counts at no more than 50% of net book value, or 80% with an orderly liquidation appraisal. Furniture and fixtures count at 10%, and the lender must lien inventory and receivables at 10% of book. The client list, name and phone number can be financed but count for nothing.
Your lender decides which bucket each item goes in. Styling stations and hydraulic chairs are most likely furniture and fixtures at 10%. Hood dryers, color processors and plumbed pedicure chairs may count as equipment at 50%. In Renee's deal, that choice moves her credit between $15,500 and $7,500. A build-out in leased space generally earns no credit toward the SBA's fully secured test, and any value a lender gives it is its own call.
Your home
- Purchase or Standard 7(a), short on collateral: the lender must take available equity in a home you own alone, unless that equity is under 25% of its value, and must consider a lien on a home you own with your spouse.
- 7(a) Small start-up over $50,000: a first lien on what the loan pays for. A lien on your home is optional, and some lenders take one.
- $50,000 or less on 7(a) Small or Express: no collateral required.
A loan can't be declined just because collateral is short. On a Standard 7(a) loan for a one-owner business that isn't fully secured, expect life insurance in the amount of the shortfall, and expect the same request on a smaller purchase loan.
Your lease term vs your loan term
Almost every salon leases, and the lease can make or break the loan. When leasehold improvements take $500,000 or 30% of the loan, whichever is less (or build-out and attached fixtures and equipment make up that share of the collateral), the lender must get your written lease. For a 7(a) loan, the lease term should equal or exceed the loan term. It must if the lender can't get an assignment of the lease and a landlord's waiver. Only renewal options that you alone can exercise count toward the term.
- A build-out loan can run 10 years, plus up to 12 more months while the work is finished.
- A purchase loan can run no more than 10 years when no real estate is in the deal.
- A salon with four years left on its lease can be a problem for a 10-year loan. Renee signs a new 5-year lease with a 5-year option only she can exercise, 10 years in all.
- Before you sign a lease for a start-up, ask your lender what term it wants to see. Brooke signs 5 years plus two 5-year options, 15 years.
Free: the 27-Point SBA Loan Checklist
Includes the equity, coverage, collateral and lease checks above, in the order a lender works through them.
✓ You're in!
Your 27-point SBA loan checklist is downloading now, check your downloads folder. We've also added you to the list for SBA updates from Hartwell Labs.
Enter your email and we'll send you the free 27-point checklist instantly.
Enter your email and we'll send you the free 27-point checklist instantly.
No spam. Unsubscribe anytime. We'll also notify you of new book editions.
Worked example: starting a nail salon for $300,000
Brooke has done nails for nine years, the last four as lead tech at a busy salon across town. She opens her own salon with 6 manicure stations and 8 pedicure chairs in a leased strip-center bay, through her new LLC. Every number comes from the FUNDED Nail Salon Guide. The 9.50% rate is illustrative.
Brooke's start-up, SBA 7(a) Small
| Item | Brooke's deal |
|---|---|
| Build-out (plumbing for pedicure chairs, ventilation, electrical, finishes) | $150,000 |
| Equipment (pedicure chairs, manicure tables, dryers, sterilizer) | $70,000 |
| Furniture (front desk, waiting area, shelving, sign) / opening supplies | $25,000 / $10,000 |
| Working capital | $45,000 (17% of the loan) |
| Total project cost | $300,000 |
| Equity (10%) | $30,000: $20,000 of savings + a $10,000 gift from her parents. Her $5,000 of course tuition doesn't count |
| SBA 7(a) Small loan | $270,000, 10 years |
| Payment at an illustrative 9.50% | $3,493.73 a month, $41,925 a year |
| Projected cash flow after her $40,000 salary, first 12 months / next 12 | $50,000 / $70,000 |
| Coverage, first 12 months / next 12 | 1.19 / 1.67 (floor 1.10 within one year) |
| Household (global) coverage, first 12 months | 1.25 (her lender's test) |
| Guaranteed portion / FY2027 upfront fee | $202,500 (75%) / $6,075 |
The four-month build-out counts inside the first 12 months. Had the first 12 months come in at $45,000, coverage would be 1.07 and the loan would have to move to Standard 7(a) or SBA Express.
For detailed calculations and real examples, see the FUNDED Nail Salon Guide (coming soon).
A few details make or break a start-up like this one. The $150,000 build-out is over the $81,000 lease trigger (30% of the loan), so her lease goes in the file, and it runs 15 years with her options. Her lender takes a first lien on everything the loan buys and, by its own policy, a junior lien on the home she and her husband own jointly, with $120,000 of equity. As SBA Express, the same loan would carry a 50% guaranty ($135,000) and a $4,050 fee, and her lender would still be likely to ask for the 10%. Interest-only during the build-out is allowed by the SBA if her lender offers it.
Worked example: purchasing a hair salon for $400,000
Renee has managed someone else's salon for 12 years. Her new LLC purchases the assets of a 10-chair commission salon with 8 stylists on payroll, open 22 years, in leased space. Every number comes from the FUNDED Hair Salon Guide. The 9.50% rate is illustrative.
Renee's purchase, Standard 7(a), Initial Acquisition
| Item | Renee's deal |
|---|---|
| Receipts, last fiscal year | $750,000 ($150,000 from the founder's own chair) |
| Purchase price | $400,000: stations, chairs and furniture $40,000, dryers and shampoo units $20,000, product $15,000, client list and goodwill $325,000 |
| Independent business valuation | $410,000 |
| Closing costs / working capital | $15,000 / $35,000 |
| Total project cost | $450,000 |
| Equity (10%) | $45,000: $25,000 cash + $20,000 seller note on full standby (cap $22,500) |
| SBA 7(a) loan | $405,000, 10 years |
| Payment at an illustrative 9.50% | $5,240.60 a month, $62,887 a year |
| Cash flow after a $60,000 market salary, last year / prior year | $80,000 / $75,000 |
| Coverage, last year / two-year average | 1.27 / 1.23 (floor 1.25, which takes $78,609) |
| Household (global) coverage | 1.32 (floor 1:1) |
| Guaranteed portion / FY2027 upfront fee | $303,750 (75%) / $9,112.50 |
The SOP lets the lender use the last fiscal year or the two-year average. On the average she misses; her lender uses the last year. The founder's claimed $40,000 of unreported cash counts as zero.
For detailed calculations and real examples, see the FUNDED Hair Salon Guide (coming soon).
Collateral is thin. Fixtures at 10% ($4,000), dryers as used equipment at 50% ($10,000) and product at 10% ($1,500) come to $15,500, a shortfall of $389,500. Her home has $150,000 of equity, above the 25% line of $100,000, so her lender takes a lien. That still leaves $239,500, and because her loan is Standard 7(a) and her LLC has one owner, she carries life insurance for that amount.
The founder leaves the floor at closing and consults for 12 months to introduce Renee to clients and staff. There is no earnout. Instead, a buyer rebate refunds up to $30,000 if the founder's clients bring in much less than expected in year one, and the refund goes to the loan principal. Renee also files for a new establishment license, since in her state it doesn't pass with the sale, and her lender needs evidence of every license within 90 days after the loan funds.
Run your own salon numbers, free
No sign-up. Each one uses the SOP 50 10 8.1 rules above. Your lender makes the final call.
- Equity injection calculator: your 10% and what counts toward it
- Global DSCR calculator: business and household coverage
- Collateral adequacy calculator: fixtures, equipment and your home
- Max purchase price calculator: the most a salon's cash flow supports
- SBA loan calculator and guaranty fee calculator
Common mistakes on salon loans
- Pricing on unreported cash. It counts as zero, and any price above the valuation comes out of your equity.
- Agreeing to an earnout. The SBA prohibits a price that grows with future results. A buyer rebate, paid back to loan principal, is allowed.
- Counting on the seller to stay behind the chair. In an Initial Acquisition the seller can consult for up to 24 months but can't stay as an employee.
- Assuming booth rent years count as employment. The SOP doesn't say they do. Expect Initial Acquisition rules.
- Signing a short lease. A lease shorter than the loan, counting only options you control, can stall the loan.
- Adding an owner who isn't a U.S. citizen or national. Fix ownership before you apply. A green-card holder can work in the salon but can't own any part of it.
- Counting tuition as equity. School and course costs are not equity.
- Assuming the establishment license transfers. State law decides, and many states require a new one. Check with your state board before closing.
- Leaning on a Seasonal CAPLine for slow months. It can't pay to keep the salon going through a slow stretch.
What to bring your lender
How to finance a salon with an SBA loan
- 1
Name your path
Start-up, purchase as a first-time owner (Initial Acquisition), Owner Buyout after 24 months on the payroll, or your salon purchasing a second shop in group 8121 (Business Expansion). Ask your lender which one it sees.
- 2
Gather the numbers
For a purchase: three years of the seller's tax returns and financial statements, the latest interim statement and the same months last year, and service revenue by stylist or tech, so the lender can see the owner's chair. For a start-up: 12 months of projections (7(a) Small) or two years (Standard 7(a)), with your assumptions.
- 3
Show how people are paid
List who is on payroll, who is paid on a 1099 and who rents a chair, with the chair rent in dollars. Ask how your lender will count chair rent.
- 4
Document your 10%
Bank statements for your cash, a gift letter for any gift, and a full standby agreement for any seller note. Leave tuition out.
- 5
Bring the lease and the build-out
The current lease and renewal options, or the proposed lease, plus contractor bids and the build-out timeline.
- 6
List the assets
Stations, chairs, dryers, pedicure chairs and product, with book values and any existing liens. Bring your personal financial statement and your home's value and mortgage.
- 7
Map the licenses
Your own license and the salon's establishment license. Check with your state board whether a new one is needed; the lender needs evidence within 90 days after the loan funds.