You have successfully launched your first Studio and it is profitable. What is your next step? Sit back and enjoy the fruits of your labor or build another studio? Whether it’s a barre, yoga, or cycle studio, most new studio owners pay the costs for their first studio from their personal resources. When it comes time to launch another studio, that same game plan may not be an option, so what are your options?
One option is to find investors, however that comes with a price … partners. Another option is to use the following debt financing options that exist in today’s marketplace. If this sounds appealing, read on.
Equipment Leases – Capital Leases to Own
Most studio owners can finance the purchase of their strength & cardio equipment, security systems, computer hardware & software, flooring, outdoor signage and other tangible items needed to open the 2nd location with an equipment lease. All of the items that are being financed will be the collateral for the lease. The lease will be written to the business entity, however owner(s) must also personally guarantee the repayment of lease.
Lease documentation fees typically range from $95 to $495. The $ required as a down payment will range from 1 payment to 20% of the amount financed. The main benefit of an equipment lease is that it preserves your operating capital. The borrower can select any repayment term ranging from 24 months up to 60 months. The longer the lease term selected, the less $ per monthly lease payment, however the total of payments will cost more. The same principle holds true for a house mortgage or an auto loan.
All lease payments are a tax deductible business expense so the monthly lease payments will lower the taxable income and, in turn, the tax liability of the business. Since most owners plan to keep the equipment long term, they choose a capital lease, which offers a $1.00 or $101.00 buyout at the end of the lease term. In essence, a capital lease is used to finance the purchase of all the equipment needed to open and run the studio.
Small Business Administration (SBA) Express Working Capital Loan
This unique government-backed loan was designed to provide a business owner working capital ranging from $20,000 up to $150,000. The loan is available for both start-up and existing businesses. The main purpose of this loan is to provide the necessary working capital needed to pay bills and an owner’s salary until the business becomes profitable.
The SBA loan underwriting process typically takes 60 to 90 days to complete before the loan is funded, and it requires an attention to detail. If the loan is being used to finance a new or 2nd studio location, the loan may be approved in advance, however the funds will not be distributed until the location has received a certificate of occupancy. This policy is in place to insure that the money is not used to finance the build-out expenses and is available for working capital once the new studio is open for business.
The interest rate is calculated by starting with the prime rate published in the Wall Street Journal, which is currently 3.5%. The bank charges a 2.75% risk premium, which is fixed for the entire term of the loan. Consequently, the interest rate on the SBA Express loan is currently 6.25%. There are 3 points charged as fees to package this SBA loan when included in the amortization schedule makes a 6.9% effective annual percentage rate on this loan when including the interest expense and packaging fees.
The repayment term is 10 years with no pre-payment penalty. The best feature of this loan is that the collateral is the business assets… not your home, just your business! When considering the annual percentage rate, the repayment term and the collateral, this loan product is by far the best financing product on the market today!
The main benefit of using debt financing is access to other people’s money vs. securing equity financing, which requires bringing in business partners. The key to success when using debt financing is to access the $ at a lesser cost than your projected business profit percentage. For example, if a $20,000 equipment lease has a 13% return to the leasing company and an $80,000 SBA Express Loan has a 7% interest rate, the business owner is accessing $100,000 at an 8.2% blended interest rate. Assuming your studio will operate at a 16% profit margin, your cost of using OPM is approximately half of your anticipated return on capital!
In conclusion, the equipment lease and the SBA Express Loan are complementary debt financing products. These products, when used in unison, can enable an entrepreneurial personal trainer with good personal credit the financing needed to open a new or 2nd fitness studio.
Paul Bosley has worked in the fitness industry for over 40 years both as an owner-operator and as a financing source. Paul is the owner of www.healthclubexperts.com & can be reached by calling (800) 788-3884 or by firstname.lastname@example.org.
Meet Paul in person at a MANIA® near you! Learn more at www.scwfit.com/mania.
This article originally appeared in the eNewsletter: https://scwfit.com/enewsletter-august2016/#financing