You’ve decided to start your own personal training business. You’ve conducted a realistic assessment of the market and created a working business plan, so you know how much money you need to finance your start-up. Where do you get that money?
The fact is, most small businesses fail in the first 2 years, so you have to make sure you have plenty of financial breathing room. If you haven’t saved enough money on your own, here are a few options for securing the necessary financing.
Call on Family and Friends
You may choose to solicit friends and/or family to assist you. If so, remember that this is a business transaction. Make a sound, cohesive loan request presentation just as you would to any other lending source. Provide financial statements and tax returns to help support your request.
Prepare a written agreement that includes
- the date the money is to be loaned
- the interest rate
- the payment schedule
- any penalties for failing to meet the above terms
If you don’t have all the details in writing, arguments are almost certain to sour the relationship. Even some minor detail, such as the timing of interest payments, can cause friction.
There are drawbacks to borrowing from those you know personally. Family members may not be too happy if you head off on a vacation or buy a sleek new sports car when you still owe them $20,000. Although borrowing from
relatives seems like an easy option, dealing with a financial institution may be less stressful in the long term.
Secure a Bank Loan
If you have substantial assets, such as a house, you might secure a small loan from a bank. When dealing with small businesses, however, banks sometimes heavily discount the protection that an asset such as a house offers. The concern is that you will quickly convert this asset into cash to cover operating losses if your business experiences financial difficulties.
In addition, while bankers like the ultimate protection of hard assets, they also want to feel there is little chance they will have to call on these assets to pay off the loan. Bankers don’t care if your business has sky-high profit potential; they are only interested in whether or not you can make enough to cover your payments!
Be prepared to produce your recent tax returns, financial statements and cash flow projections. Be clear about exactly how much money you would like to borrow. If you have difficulty obtaining a bank loan on your own financial merits, you can ask someone to cosign. Cosigning indicates that a person is prepared to put up some or all of his or her assets as collateral on the loan.
Another option is to apply for a Small Business Administration (SBA) loan. SBA loans are designed specifically for qualified small businesses that might not be eligible for business loans through normal lending channels. The proceeds from SBA loans can be used for most sound business purposes, including working capital, equipment, tenant improvements, and land and building expenses (including purchase, renovation and new construction). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. SBA loans are available from most banks and secured in part by the federal government. For more information go to www.sba.gov.
Apply for a Home Equity
Loan or Line of Credit
If you own a house, another option to consider is a home equity loan or line of credit. You can use the equity you have built up in your house to get a loan or line of credit from a number of different lending sources. One advantage is that the interest on these loans is
usually tax deductible.
A home equity loan provides you with a set amount of cash with a fixed repayment term. At the loan closing, you get all the cash for which you have been approved. A loan is a good choice if you know the exact amount you need for getting your business started.
A line of credit provides more flexible funding, allowing you to use any amount of cash you need (up to your approved limit) at any given time. This is probably the best choice if you will have an ongoing need for funding—for example, to pay for the lease of your premises and equipment until you have enough clients to start making a profit.
Approach Potential Investors
Another option is to go to investors with your plan. Make sure you know ahead of time how much control you want to retain over your business and how much you are willing to give up.
In my case, some investors asked me
to present my ideas to them. After a couple of meetings, they agreed to put up the necessary capital. Nothing stood in my way, right?
Not exactly. I soon realized that my investors wanted a proportional say in how my business was operated. This is not necessarily a bad thing. If you have potential investors whose skills in areas like marketing are sharper than yours, or if you want to share responsibility for the success of your business, investors’ participation may be a bonus. I personally didn’t feel suited for a partnership and decided to raise the capital I needed through other means.
Before approaching investors, be well prepared with a professional presentation and marketing strategy. Supply a copy of your business plan (see “The Start-Up”
in June 2004 IDEA Trainer Success) and be prepared to support all statements you make with documentation.
Turn to Your Clients
You can also raise money by preselling sessions to your clients. If you already give discounts for bulk sessions, consider giving bigger discounts to clients who are willing to purchase sessions in advance for the next 6 months or 1 year.
The Importance of Hiring
However you finance your start-up, hiring an accountant is imperative. A good accountant can help you save thousands of dollars in tax write-offs related to some of the huge expenses you will incur. Ask other fitness professionals for names and take the time to interview prospective candidates thoroughly.
In the next article in this series you will learn how to secure a lease and design a space to fit your needs.
One way to reduce the amount of start-up capital required for your new business is to lease your equipment rather than buying it. Many equipment manufacturing firms have leasing programs. You can often purchase the equipment at the end of the lease term for its market value or less.
One great advantage to leasing is that the cost of equipment may be “off the balance sheet.” This means that leases can be disclosed as balance sheet footnotes and do not appear as debt even though they represent an ongoing liability. If a bank is weighing a loan proposal you have submitted, the lease commitment will play a relatively minor role in evaluating your debt burden. In addition, a bank is more likely to lend you funds
if you have obtained financing for equipment by leasing it through a third party, rather than asking the bank to meet all your financial needs.