Mortgage Financing Strategies for Salon Owners

Opening or expanding a salon requires significant upfront capital to cover costs like securing a retail location, designing and building out the space, purchasing equipment, hiring staff, and having enough working capital to keep operations running smoothly in the first year.

These major investments often reach hundreds of thousands of dollars or more, so many salon owners turn to financing to cover the initial expenses.

One option for salon financing is through mortgage loans. Mortgage loans allow salon owners to purchase commercial real estate to house their business. Here are some key strategies for leveraging mortgage financing to grow your salon:

Understand the Types of Salon Mortgage Loans

• Commercial Real Estate Loans – Used to purchase an existing building or construct a new one for the salon. Typically have higher down payments around 30% and higher interest rates than residential mortgages.
• Commercial Construction Loans – Short-term loans used to finance the construction of a new salon building. Borrowers make interest-only payments during construction, then refinance into a permanent mortgage once construction is complete.
• Commercial Bridge Loans – Short-term loans used as temporary financing until a salon can secure permanent financing or sell the property. Useful for purchasing a property quickly.

Prepare a Strong Application Package

• Develop a Detailed Business Plan – Lenders want to see a comprehensive plan outlining the salon’s concept, target market, financial projections, and management team.
• Maintain Good Credit – Salon owners will need a credit score of at least 680 to qualify for most commercial mortgages. Lenders also look at the business’s credit history.
• Have a Sizable Down Payment – Typically 30% of the property’s value is required as a down payment for salon mortgages. The more you can put down, the better the loan terms.
• Provide Collateral – The salon property itself serves as collateral for the mortgage. Lenders may also require additional collateral like equipment or inventory.
• Demonstrate Sufficient Cash Flow – Lenders want to see that the salon’s projected revenue can comfortably cover the mortgage payments. A DSCR (debt service coverage ratio) of 1.25 or higher is preferred.

Negotiate the Best Loan Terms

• Shop Around for Competitive Rates – Currently, 10-year fixed-rate salon mortgages range from 5-7% interest. Rates are higher than residential mortgages due to the higher risk.
• Aim for Maximum Loan Amounts – Typically up to 70% of the property’s value. The exact maximum depends on the salon’s projected revenue and the owner’s creditworthiness.
• Secure Favorable Repayment Terms – Salon mortgages usually have 10-25 year repayment periods. Amortization schedules are set up based on a 25-30 year period, with a balloon payment due at the end of the term.
• Minimize Fees – Expect to pay 2-5% of the loan amount in origination fees, plus closing costs which can add another 2-5%. Negotiate these fees down where possible.

By developing a strong application package, shopping around for the best rates and terms, and leveraging the benefits of commercial real estate ownership, salon owners can use mortgage financing to grow their business.

The key is finding the right lender who understands the unique needs of the salon industry.