Opening a franchise is becoming an increasingly popular way to open your own business. These opportunities offer a variety of benefits of being a small business owner such as flexibility, independence, and autonomy while providing the support and infrastructure of a large corporation. And the startup cost is generally much lower than what would be required to open the doors of a new establishment completely on your own. On average, the average start-up costs for opening a fitness studio can run upwards of $800,000 as you will need sufficient space and fitness equipment in addition to marketing and other business costs. That being said, opening a franchise is still a significant investment requiring more capital than many people have immediate access to.
If you dream of starting a gym franchise, there are many financing options available to you. However, navigating these resources can be complex and difficult. Below we are breaking down some of the most common franchise financing options currently available so you can make the best choice for your business needs.
How to Finance a Franchise
Despite what many may believe, you are not restricted to small business loans for franchise financing, although loans are a common choice. In fact, there are a variety of creative solutions available to you. The list below consists of six of the most popular ways to secure capital for your next franchise endeavor.
1. Your Franchisor
One of the primary benefits of franchising is that you will be an extension of a larger brand and organization. If you are seeking financing for your health and fitness center, one of your first conversations should be with your potential franchisor to discuss the resources they offer to new business owners. In fact, many corporations with franchise models offer custom financing solutions designed specifically for their franchisees. These are generally provided through partnerships with specific lenders or capital coming directly from the corporation.
The terms of such an agreement will vary based on the company you are franchising, but some may take on as much as 75% of the debt burden from their new franchisees. However, nothing is free and the structure of payments could make such a sweet deal turn sour down the line. Some franchisor financing agreements involve deferred payments which allow you some time to get the business off the ground before the corporation comes to collect. This could be nice at first but may cut into your profits later on. Other offers may structure repayment on a sliding scale, giving you more flexibility for how you would like to return their investment. Regardless of the terms, it is important to clearly understand the terms of your agreement before you sign and you should, therefore, have your own attorney or accountant review the details.
Working directly with your franchisor to secure financing is one of the best and easiest ways to build the needed capital. First, this makes your franchisor the single resource for all your business needs from the financing to your marketing, though many franchisors offer these resources regardless of how you secure financing. Secondly, no one knows your business quite like the company you are franchising with. They will already know all the risks you are taking on in opening a business with them, leaving you with fewer questions to answer. They will be able to quickly and easily assess your viability as a franchisee and the viability of the market you propose to open your location in.
2. Commercial Bank Loans
Another popular way to finance your franchise is through a traditional term loan provided by a commercial bank. This can seem intimidating, but it’s a lot more common than you might think. For instance, if you have ever taken out a home mortgage or student loan you have already participated in term loan financing. Using this model, a bank will provide you with a lump sum of cash up front which you then repay over a set period of time in monthly installments plus interest, the rate of which will vary depending on the terms of your loan.
Applying for a commercial bank loan will require you to provide the lender with details about your personal credit history and a review of your business plan. This information will help the lender to assess the risk of investing with you. Through this process, the lender is seeking to determine if you can reasonably afford to repay the loan you are requesting in a timely manner. Their assessment will determine the size of the loan they are willing to provide you with as well as the interest rate it will be subject to. Generally, it is safe to assume that the higher your credit score is, the more favorable loan terms you will receive as you will be seen as a more stable investment.
3. SBA Loans
Perhaps one of the most desirable financing options for aspiring franchise owns are loans partially backed by the United States Small Business Administration (SBA) and funded by their intermediary lending partners. They are known in short as SBA loans. The structure of an SBA loan is very similar to that of the traditional term loan model supported by commercial banks. However, the SBA guarantees a portion of the loan amount, which reduces risk in the long run. This, in turn, helps to incentivize lenders to offer a loan with a lower interest rate and longer repayment terms than they would otherwise.
While this is clearly a very desirable option, the qualification standards can be very strict, and filling out the application can be a long and tedious process. So before you pursue this opportunity to help with costs, you will want to spend some time carefully reviewing your finances and critically considering your chances of being approved for an SBA loan. Otherwise, you may spend significant time applying for a loan that is unattainable at your current stage. However, if you have the financial stability and credit score to possibly be approved, it is worth the commitment of your time and energy.
4. Alternative Lenders
Typically, alternative lenders have more lenient requirements and shorter turnaround times than more traditional financing options. So this can be a great option if you need to secure your financing quickly or would like to supplement your commercial or SBA loan. These lenders offer a variety of loans such as fitness equipment financing or business lines of credit in addition to term loans. Although all this access and convenience comes at a cost.
Alternative lenders generally offer shorter repayment terms, higher interest rates, and smaller loan amounts than traditional lenders which could leave you in an undesirable situation. Though if you require the cash quickly in order to not miss out on an opportunity, are supplementing another loan, or are unable to qualify for other loan options, alternative lenders are worth considering.
Thanks to modern technology, franchisees now have access to a variety of potential investors that they may not have been able to previously connect with otherwise. Known as crowdfunding, this more creative method relies on the small contributions of many people to reach a specified monetary goal. Through this option, you could choose to set up your own personal crowdfunding page or connect with an organization that crowdfunds on behalf of other businesses. Though if you choose to pursue this type of funding on your own, you may consider utilizing a website specifically geared toward your industry or business type so that you are reaching out to the most likely investors for your fitness club.
Crowdfunding your franchise financing will require some creativity and persistence in order to connect with the right people, but it can be a great option if more traditional methods are not available to you, whether due to an adverse financial history or unfavorable interest rates.
6. Friends and Family
In reality, one of the most common and relied upon franchise finance models is to simply ask for money from your friends and family. This could be done in a variety of ways including asking for a gift, proposing the terms of a loan, or bringing a family member or friend on as your business partner. The most obvious benefit of this option is that the money will generally be provided at a low cost to you. However, you will run the risk of lost friendships or familial disagreements if the business does not succeed.
If you choose to secure a loan directly from or partner with friends or family, you may be able to avoid some of the potential complications by writing up a contract for all to agree upon. For a loan, this should clearly state the repayment terms and other relevant points. A partnership agreement should explicitly state the responsibilities of each party and the share of profits they will receive. If all involved understand the agreement and expectations up front, you will be more likely to avoid uncomfortable or awkward situations later on.
Selecting the right financing option for you, your business goals, and your financial needs will help set you up for success as you pursue a fitness club. It is crucial that you carefully evaluate your current financial situation and critically evaluate what you require in order to move forward.
Franchising with Rush Cycle
Rush Cycle is one of the fastest growing fitness brands in the country with 18 locations currently open and over 40 new locations opening soon. We strive to provide the communities surrounding our locations with the most efficient cardio workout while maintaining a high standard of quality and convenience. Our instructors are trained to deliver an adrenaline-packed class, creating a unique workout experience so our clients can get results while having fun.
With Rush Cycle, you are never alone. Our team has over 40 years of franchising experience and offers comprehensive support for our franchisees from day one. We will provide guidance to you as you identify an appropriate market for your fitness franchise, construct the studio, market your opening, and train your staff. When you work with us, you will become part of a family focused on creating a positive workout environment and community. Plus, our affordable entry point of around $400,000 means more opportunities for more people.
Becoming a franchise owner is an incredible opportunity to start a business with some of the risk mitigated. You will have the autonomy to make decisions with the safety and support of our organization behind you. Securing financing is just the first step on a life-changing journey. What are you waiting for?
Still wondering if franchising is right for you? Learn more about the benefits of opening a franchise versus starting your own business here.