A CLoser Look
entrepreneur lesson: A Hair Salon's Growth pains and joys
Danny and Lauren Chaldez started their own business to reach their career and family goals. The tough lessons they learned included the need for funding to expand operations so they could boost income. This article is based on my interview with them and Noah Breslow, CEO of OnDeck, a technology company that enables qualified "Main Street" businesses to access the capital that banks will typically not provide.
Plumbing? I do Hair!
Lauren Chaldez loved the confidence and self-assurance her clients experienced when she styled their hair in the salon near Hollywood's studios and the Farmer's Market. Shaping, cutting, and recommendations for care came from her decade of experience in addition to her studies. She knew her craft well but changes in the salon that had hired her left her dissatisfied and restless. Her husband Danny could empathize since he was unhappy in his position as an Information Technology professional. Their dream of starting a family and enjoying fulfilling careers seemed out of reach until the couple decided to lean on Lauren's skills and open a hair salon.
I visited their shop, Stag Hair Parlor, on Melrose Avenue and asked what challenges confronted them when they opened their business.
Lauren laughed, remembering the multiple issues. "Everything business related because the fact is we're not entrepreneurs. We're just regular people who didn’t like their jobs. We thought we knew everything [about opening a business]."
Danny jumped in. "You've got to be prepared for things to go wrong because things do go wrong."
Lauren invited some of her coworkers from her previous company to join the start-up and that enabled Stag Hair Parlor to launch with a small client base. Unexpected expenses stung the business like pesky bug bites and ate into the initial cash flow. "We didn't budget for extra expenses."
Danny nodded and his eyes widened from the memories of just a couple years back. "Things like plumbing. We found out we needed two sinks instead of one and would ask 'How much is that going to cost us?' and 'Oh, my God, I didn't think it would be that much!'"
Tracking inventory for the hair care products and handling employee issues was another part of the learning curve.
"We're on top of that now, three and a half years later," said Lauren.
OnDeck's ceo noah breslow mingles
Get a Few Bucks and Call Me in the Morning
The couple got a business loan from OnDeck funding during a critical juncture in their operations. Lauren said it was a "lifesaver" when they were in a crunch and needed capital.
OnDeck is a technology platform founded in 2007 that connects small business owners needing money with investors. The CEO, Noah Breslow, who's quick to smile and likes meeting his customers, was having his hair styled when I visited. He waved from beneath the black cape and I excused myself to join Danny and Lauren in the back.
"How did you find out about OnDeck?" I asked.
"It was incidental," said Danny. "We had been operating for two years and needed money for upgrades."
He said family members loaned the initial capital to open the salon's doors, but didn't want to ask the same people for more money to make capital improvements. "You can't keep picking from the same tree.
"We wanted to expand our product line and needed more chairs so we could hire more stylists to make more money. We didn't have the funds to do that. I started searching, came across [OnDeck], and started looking for negatives about the company."
Danny said the company had the fewest complaints so he decided to try the service. "It's an easy process. They outline the whole loan for you and they tell you how much it's going to cost you and there are no surprises. They were up front about how much we could borrow."
OnDeck's website touts a 10-minute application process with loans from $ 5,000 to $ 250,000 and an average term ranging from six months to 12 months.
I asked Danny and Lauren if they first tried the banks.
"We did but we hadn't yet incorporated," said Lauren, "and we hadn't built the credit to meet the loan requirements. That's another thing we learned along the way. If your business doesn't have credit you're not going to get a loan."
Danny said he went to Wells Fargo and Chase but OnDeck provides a personal touch with service reps who make occasional follow-up calls. "I don't feel like I'm borrowing from a bank. It's not cold."
When Small is Huge
After the stylist finished with Noah Breslow, he joined our conversation and said businesses like Stag are the sweet lending spot for OnDeck's that got its start in 2007 and sailed into the fiscal turmoil of 2007-08. I asked Noah to tell me what banks weren't providing and why OnDeck believed there was a need for its services.
"Most banks define small business as businesses with revenue of less than $25 million dollars and that's a huge category. For businesses with less than $5 million dollars revenue, banks are not natural lenders to that segment."
He explained that banks are equipped to make the million-dollar loan and they have all the same overhead and infrastructure when making a $40,000 loan. "Banks don't make money on small loans to small businesses and they don't use a lot of technology, either."
Wells Fargo is the largest small business lender in the Los Angeles area. Noah said that if you click through the Wells Fargo website, the loan seeker is told to go into the branch and take lots of documentation. "A traditional lending process takes a lot of time and up to 50 percent of requests are not met. The average business owner can spend up to 26 hours of their time trying to get credit and need to go to at least three different financial institutions to do it."
OnDeck aggregates information to speed up the process. Danny got his loan of $35,000 for Stag Hair Salon in less than a week after making his request. OnDeck's platform means the business owner never has to leave her site and reduces the actual time needed to secure funding.
Noah said the company's first loan was for five thousand dollars to an auto repair store in Connecticut. A billion dollars has now been lent to small businesses around the nation.
"We skew toward independent business owners rather than franchises," said Noah.
Restaurants comprise about 18 percent of OnDeck's portfolio while hair salons, auto repair shops and doctors and dental practices are among the other popular categories.
I asked Noah about the default rates and he said they peaked in 2008 and 2009 when the economic downturn was at its lowest point. "The world was falling apart and we were a young company. We've built the OnDeck score to better determine the credit worthiness of a company and it goes way beyond personal credit questions like, 'Do you pay your mortgage on time?' It's much more how many customers do you have in your actual business and how do you manage your cash flow?"
Noah said the default rates are stabilizing into the single digits, but he declined to give a specific percentage to total loans made. He said as the OnDeck gains a stronger track record then more investors are willing to fund the loans and that allows the company to access more capital.
On Deck survived the 2008-09 challenge and the skeptics who didn't think mom-and-pop types of businesses were great credit risks.
Noah said his goals are "disrupting the [lending] industry" and servicing the niche for businesses needing capital fast. An example, he explained, was a restaurant gets a call on Wednesday for a large catering job that Saturday. They need an infusion of money to buy food and hire a large number of temporary workers.
He and I discussed if independently-owned shops will be able to survive Big Box stores. "There's a reason Stag Hair Parlor exists. They've got talented stylists and it's not a chain like Supercuts.
"Small businesses are unique and differentiated from franchise operations and they offer value. We track why business owners need the loans. In 2008-09, owners needed money to play defense and keep operations afloat, but now 80 percent of loans are made to expand capacity, purchase more inventory, or remodel facilities."
Since I'm someone with perpetually bad hair-days, I grabbed a piece of advice from Danny and Lauren before leaving. "So what's one word in hair care for me?"
"Don't buy shampoo from Rite Aid," laughed Danny.
With the right amount of funding, Stag Hair Parlor has the stylists in place to service its clientele while Danny and Lauren have earned more business experience and can see how their maturing company can help them reach the goals they for their family.
Don's Quote of the Month
If you run your business on a shoe string, be careful not to trip over it.
Struggling to Access Capital
82% of those who applied for traditional bank loans were DENIED
64% simply cannot secure financing from any source
source: OnDeck Main Street Pulse Report