Obtaining financing can be a scary process for fitness business operators, whether or not they have experience with it. To help take the unknown out of the process, here is some information for fitness franchisees who need financing.
Financing Franchises Costing $350,000 or Less
In 2014, the Small Business Administration (SBA) introduced the Small Loan Advantage loan program that some lenders refer to as the SBA Express loan. After the recession of 2008, many homeowners lost their real estate equity which is used as collateral requirement for a SBA 7(a) loan approval in most cases. Consequently, many perspective borrowers were unable to secure financing because they lack the equity in their home required to collateralize their loan request. The SBA Express loan is capped at $150,000 to limit the lender’s risk since the borrower’s real estate collateral is not required and business assets are used to collateralize the SBA Express loan. Since the collateral used to secure an equipment lease is the equipment being financed and the collateral for the SBA Express loan is the equipment needed to operate the business, these two debt financing products are compatible.
Capital Leases – Leasing Equipment to Own
The most common financing option for fitness equipment is a capital lease. The main purpose of a capital lease is to finance the equipment purchase while preserving the owner’s working capital. Franchisees can finance the purchase of their proprietary equipment, security systems, computer hardware and software, flooring, outdoor signage and other tangible items needed to run the business using an equipment lease. The owner(s) are required to personally guarantee equipment lease. The required down payment ranges from a lease payment up to 20 percent of the amount financed. Lease documentation fees may range from $95 to $495. Repayment terms typically range from 12 months up to 60 months. All payments are tax deductible, so these payments will lower business’s taxable income and, in turn, tax liability. Since the plan is to keep their equipment long term, a typical capital lease offers a $1.00 end of term purchase option.
Small Business Administration (SBA) Express Working Capital Loan
In conclusion, equipment leases and SBA Express loans are complementary products that will enable an entrepreneur with good personal credit to finance the opening and expansion of a franchise. The best part about this financing combination of an SBA Express loan and equipment lease is that the collateral is your business assets, not your home.
Financing Franchises Costing $350,000 or More
The loan repayment term is 10 years. Prepayment penalties typically range from 1 percent to 4 percent over the initial term period. The interest rate is typically prime rate as published in the Wall Street Journal (4.25 percent) plus a risk premium typically 2.75 percent, so the current rate offered is 7 percent. Closing costs are approximately 3 percent of the loan amount and are usually added to the loan amount.
Real Estate Acquisition
The SBA loan will finance up to 90 percent of the real estate acquisition cost. The owners’ equity injections are typically 10 percent of the acquisition cost of the real estate and cannot be borrowed money, such as a home equity loan. The business must occupy at least 50 percent of the useable space, which provides an opportunity to lease out up to 49 percent of the usable space. The collateral is real estate being purchased. Good personal credit is required. The loan repayment term ranges from 20 to 25 years and is fully amortized with no balloon payment. The interest rate is calculated starting with the prime rate (4.25 percent) plus a risk premium, which will vary based upon the appraisal and the strength of the borrower. The closing cost is typically 3 percent of the loan amount added to the amount financed at closing. The timing to close is 90 days and varies with bank work load, time for real estate appraisal and borrower responsiveness.
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Paul Bosley is managing member of the Business Finance Depot. He can be reached toll free at (800) 788-3884 or by email at [email protected]. Find out more at www. businessfinancedepot.com.
