Small Business Survival Story: A Hairdresser's Hair-Raising Ordeal

After being denied a loan by five banks, and seeing his original location get washed up by the torrential economy, it's a wonder that Raphael Alvarez didn't give up on his dream of opening a salon.

His place in San Diego, called Cut, was slated to open in Mission Hills in February. It took two years of planning -- spending time and money negotiating the lease, paying attorneys, getting permits, buying equipment and getting engineering work done.

Then his lawyer called with bad news: The bank had swooped in and taken the property. The money he had spent was gone.

End of story? Hardly.

The 42-year-old hair veteran miraculously found another location in Bankers Hill. Seven weeks later, the salon was up and running.

The Upside of Downsizing

That was three months ago. Looking back, Alvarez says that the down economy was actually a blessing for his business.

"In this economy, it's not as good to open such a big salon," said Alvarez, who was raised in Mexico and has been in the hair business for the past 20 years. "It works where we are now. It's more manageable."

He says the new location is superior to the original space he planned to set up shop. It enjoys more parking, better accessibility, and second-story views. At 2,500 square feet, it's half the size of the Mission Hills space, so Alvarez pays far less rent.

Still, even after Alvarez secured the new location, more obstacles kept threatening his business.

Family Sacrifices and Help from Friends

Two weeks before opening, with more construction to complete, he went to the bank after all checks were cashed that week for equipment, and found he only had $19 left in the account. "I sat in the corner of the salon and cried," he said. Luckily, one phone call to his mother resulted in the last few dollars he needed to get through opening day.

Alvarez and his wife opened the salon with the bare minimum; there was initially no place for clients to sit, and no computer or laundry. To save money, they had to take their 6-year-old girl and 9-year-old boy out of sports, and family vacations were out of the question. "There were no trips to Europe, no trips to Disneyland," he sighed.

The clients he's cut and groomed over his career also aided in the salon's opening. "I had to go to available resources, which are my clients," said Alvarez, who tapped 10 clients -- including a real estate agent, attorney, graphics designer and professor -- to help him find and negotiate a lease, write a business plan, figure out how to find funding and design a logo.

"We couldn't get a loan from a bank, so everything was put on credit cards and a small personal loan from my brother. That went quickly," said Alvarez, who tried to get $100,000 from a bank to have some working capital left over to work with.

The main criticism from the five banks that rejected the couple was the Alvarezes' lack of experience, even though they have owned a home for the past 11 years and tried taking money out of it. Tapping into their retirement funds wasn't an option, because they didn't have any.

"We opened the salon with zero working capital and no money in the bank," he said, adding that he aims to have all credit card debt paid off in a year.

The couple has dumped about $50,000 into the salon to date, and they have saved some money by designing the space themselves, completing a lot of the tenant improvements like painting, and holding back on any advertising.

During their summer break, as the couple worked 10-to-12-hour days to get the salon ready to open, they set up a "Camp Cut" for their kids with a room full of video games, books and Legos. His kids would also lend a small hand by cleaning, painting, and sweeping the salon.

Wooing the Right Help

Alvarez knew that the primary people he needed to woo were the hairdressers, who rent booths on a per-week basis and bring in their own clients through the salon doors.

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"What motivated me a lot was that the owners of the previous salon I was working at said it was the wrong time for me to do it," he said. "The economy was down and there was no way I could demand that kind of booth rental, they said."

Those negative comments fueled Alvarez's fire to demand above-market booth rental rates and attract high-end hairdressers. "They were mostly handpicked because we didn't want to bring in another culture from somewhere else."

The salon opened with enough hairdressers to cover the bills, and in less than three months, all chairs were filled with 14 part-time and full-time hairdressers and staff. Alvarez invests in employee education, and pays for trainers from L'Oreal and Redken to hold seminars at his salon.

Zigging and Zagging with the Market's Demand

Alvarez's original plan was to only offer hair services, but one month after opening, services were expanded to include waxing, massages and skin care.

Another key revenue generator at salons is retail sales, which are expected to cover the costs of overhead. "We wanted to pick a product to help us brand Cut the way we wanted, and appeal to a high-end clientele and hairdresser. Not a product you can find at a salon down the street."

His salon carries the uber-exclusive Oribe brand. It's only one of two salons south of Los Angeles that stocks Oribe, which is used on models for editorial work in Vogue and Mademoiselle, and sold at luxury department store Bergdorf Goodman.

It wasn't an easy sell to Oribe, either. The couple trained with an Oribe team in New York City last fall, and the company interviewed Cut's staff and approved of their goals before handing over their products.

Day-to-Day Dedication

Looking back, the Alvarezes' biggest hurdle wasn't making a business plan, dealing with rejection from banks, or scrambling to open a salon in seven weeks or lock down a high-end product. It was simply keeping the doors open every day.

"It has been a lot harder once we opened the doors, because it was something we were not prepared for," Alvarez said. "A lot of times, my wife said, 'You need to go to college and take a business class,' but the only way to learn it is by doing it. We made a lot of mistakes, and you just need to move forward."

Tierney Plumb is a Motley Fool contributing writer.