Looking to open up a gym? Sweet! What type of gym do you want? What type of space will you need? What type of equipment will you need? How do you plan on paying for it? How do you plan on making a profit? What’s your business plan?
These can all be tough questions to answer for first time business owners looking to open up their own training facility, especially if you don’t have a background in business. Starting off you have the passion to make it happen, so use that passion to educate yourself to make smart decisions. Once you’ve established answers to what all you need to start your gym business, you’ll need to decide how you want to pay for all of it. This article will show you the three types of financing options that are available to you and hopefully help you decide which option is best for you.
Save Up — Self Financing
Self financing is exactly what it sounds like: taking money that you have earned and saved over and using it to pay for assets needed to start your business. The positive part of self financing is that it helps keep your expenses low. You don’t have a loan payment to make every month and you don’t have to split profits amongst other investors and you keep your debt low as well since you own all the assets. You also don’t need good credit to self finance. The downside is that very few people have the cash necessary to do so. How much cash you need all depends on what your goal for your gym is. If you’re looking to open a 10,000 square feet training facility with the latest and greatest technology, equipment, and amenities, you’re looking at a much larger investment than if you want a small, minimal equipment, group training facility. Also, you’ll want some operating cash and some cash to live on when you first start up your business. Very few businesses start turning profits immediately and if you dump all your cash into equipment you may be in a bad position if you find yourself needing money to pay the bills, market your new gym, or even put food on the table.
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While self financing may be a better strategy for more mature businesses, it isn’t usually the best choice for new gym owners unless they plan on starting small and then building up from there.
Ask the Banker
Interest based financing is an agreement that a lender will lend you a certain amount of money for a certain amount of return on their investment through interest. Very simply, they’re going to lend you the money you need but they want to make some money as well. So say you need $50,000. They’re going to give you $50,000 at an interest rate of let’s say 5% a year for a term of five years. Over those five years you will pay them back the $50,000 you owe them plus $12,500 in interest. Obviously the downside of this is that you end up paying more in the long run. However, the goal is that you should be able to make far more than 5% off of that initial loan amount so that you can still pay off the loan with interest and still make some money yourself as well. This then gives you the ability to take some of your own personal cash and use it to float you through the initial portion of opening your gym till you get enough revenue to cover your expenses.
You’re going to have higher monthly expenses with interest based financing but you also get to hold onto your own personal cash — and when it comes to running a business, cash is king. You need money in the bank. If you’re good about paying your loan back on time, it will help you build better credit as well. The flip side of that is that if you aren’t very good about paying your loans off, your credit will stink and you’re not likely to get a very good loan in the future should you need one.
Interest based financing can come from several different forms. You could go to a bank and get a business loan or you may have some friends, family, or clients who are willing to give you a personal loan. Before you go out asking folks for money though, let’s go over one more type of financing option.
Ask the Investor: Equity Based Financing
Let’s say you as a trainer decide you’re sick of working for the corporate giant you’ve been stuck at the last couple of years and you want to open up your own facility but you don’t have a lick of business sense. One of your clients is a wealthy entrepreneur who has some experience owning businesses of his own and offers to help you start your business in exchange for some ownership in the company. He’s going to put in $50,000 of his own money to foot the bill for the initial equipment but in return he wants his loan paid back plus a 25% stake in the business.
This is an example of equity based financing. Your client now is a part owner, or has equity, in your business. The positive aspects of equity based financing for a gym is that, again, you don’t have to come up with the initial money all your self (at least not all of it in this case) and you can gain a partner in your journey who could provide some skills and insight that you don’t possess. Hopefully, this will help the business do better than it would have without them on board. In some cases, the investors don’t want to be too active in the management of the business and instead are just interested in the profit sharing provided by them for owning part of the company. The downside is that you have to split profits with someone else. If you’re a giant company like Apple, you’ve got pretty ridiculous profits to split out. If you’re a tiny gym barely getting by, those profits might not be too hardy. The company agreement will also determine how beneficial the situation is to each party. Equity based financing is much more diverse than interest based financing and therefore harder to give an overall pro and con list. In the end, it really comes down to each individual situation.
Which financing option is best for you will depend on what your goals are and what options you have available to you. Also, you may decide to use two different types or even all three. Within each type of financing option are several subcategories as well but this brief explanation should help you have a good idea of what option might be best for you.
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