Tim Bainton is the President of Blue Chip Sports Management based in Washington D.C. Tim is a published author and frequent industry contributor.
This month: Part 5
Alex Planes is the CEO of FoundEdge, a content marketing agency. He has worked with some of the world's largest brands and has published or syndicated thousands of articles in The Motley Fool, Business Insider, USA Today, the BBC, Fox Business, and elsewhere.
Alex leads all content strategy and development for Blue Chip Sports Management and has been integral in developing BCSM's market authority through content creation.
Club Management Mastery
A Full-Spectrum Guide to Building Better Fitness Facilities
We’ve already looked at funding your business with money from friends and family, or through angel investors and venture capitalists. In this section, we’ll look at a more standard, upfront sort of financing: the bank or SBA loan.
A loan is a familiar form of funding to anyone who’s ever taken out a mortgage or bought a car with the help of the dealership’s financing department. The process plays out similarly for businesses as it does for individuals.
This familiarity might explain loans’ popularity -- outside of personal funds, a loan from a bank or the Small Business Administration is the most common way for small businesses to obtain capital. In 2018, 34% of small business owners reported obtaining bank loans.
Many business owners confuse or conflate bank loans and SBA loans because most banks (or credit unions) process SBA loan paperwork as well as loans funded from their own capital. However, they’re not quite the same thing.
An SBA loan is actually funded by the U.S. Small Business Administration, which means it’s government-backed. An SBA loan typically harder to obtain than a loan directly from a bank, because the government really doesn’t like to lose money -- at least not where loans to for-profit enterprises are concerned.
You should expect more paperwork, more processing time, and a greater chance of rejection when applying for an SBA loan than you will with a bank loan.
With all these hoops to jump through, why do so many entrepreneurs still put in with the time and deal with tedium necessary to pursue bank SBA loans rather than bank financing? If you can get them, an SBA loan is among the most affordable ways to inject large amounts of capital into your business.
Entrepreneurs with excellent personal and business credit, among other qualifications, can potentially obtain millions of dollars for their business at rates comparable to the interest on their mortgages through the SBA. Due to its tighter lending standards, the SBA typically extends its loans at lower interest rates than a bank.
Ultimately, bank and SBA loans are pretty similar, with the SBA being more difficult upfront in order to offer more generous terms on approval. If you’re rejected for an SBA loan, you may still be approved for a bank loan at somewhat higher interest rates and/or lower loan amounts.
Unlike venture capital or angel investments, you won’t have to give up any equity in your business to take out a loan.
However, you will be expected to start paying back a loan quickly, if not almost immediately (one month) after it’s been funded. Bank and SBA loans are typically repaid monthly over a set period of time, which can be as short as one year or as long as 25.
As long as your fitness business is growing, you should have little trouble paying down your loan.
The SBA usually requires a complete and properly-developed business plan to assess whether or not you have a real and viable path towards growth and profitability. Most banks will typically ask for a business plan as part of your documentation requirements as well.
Make sure to check your personal credit history before applying for a bank or SBA loan, and try to pull business credit information as well. Dun & Bradstreet is the primary business credit reporting bureau, but Experian and Equifax (two of the three big personal credit bureaus) also maintain business credit records. Free personal credit scores are easily obtained through services like Credit Karma.
You may not have a business credit score if your company is relatively young or has yet to establish trade credit relationships with reputable suppliers and contractors. If that’s the case, you may want to skip the bank loan application process.
Only a quarter of small business applicants are approved for funding from big banks or the SBA, and only half of applicants can obtain business loans from smaller local or regional banks. A business without business credit might seem invisible to these lenders, and a business without any real financial history is usually perceived as too much of a risk for either banks or the SBA.
It’s also important to point out that it can take months for a bank or the SBA process and fund a loan application.
What can you do if your business isn’t a good candidate for venture capital, angel investments, or bank loans?
There’s another form of capital that often serves as a good alternative to bank or SBA loans: alternative financing. We’ll take a look at that in the next section.
14: Alternative Financing
Can’t get money from a bank? Don’t want to ask friends and family to stake you on your health club? What else can you do to finance the growth of your fitness business?
Quite a bit, as it turns out.
In recent years, innovative and opportunistic firms have developed a range of new ways to fund businesses. These forms of funding can (and in many cases do) supplement or even replace the traditional routes of bank loans or private investments.
Bank-sourced loans, an umbrella term under which we’ll include SBA loans processed through financial institutions, is the traditional form of “business loan” for small and midsize businesses.
Alternative lending is simply an umbrella term for any other form of non-dilutive financing. This might could mean crowdfunding or peer-to-peer lending, as well as loans with familiar structures offered by non-bank lenders.
An increasingly diverse array of alternative lenders have been established in the past decade to fund businesses that can’t get approved by banks -- or that don’t have the time to wait months for an approval.
Non-bank lenders include peer-to-peer lending platforms like Prosper and LendingClub, which pool funds from individual investors into loans offered directly to businesses. These platforms conduct due diligence on all applicants. just as any other lender would, providing its investor “crowd” with reasonably accurate assessments of each potential borrower’s risks.
For fitness business owners, the only real difference between peer-to-peer lending platforms and other lenders will be the likelihood of acceptance and the amounts and interest rates available. The application process is pretty rapid, and the likelihood of approval pretty high, but peer-to-peer lenders may have lower ceilings on how much they’re willing to lend to any one business.
Crowdfunding is another way to tap into the pooled financial resources of crowds.
Funding your business through platforms like Kickstarter or Indiegogo might cut out a bit of the middleman of peer-to-peer lending platforms since you’ll be able to tailor your pitch and solicit backers or donors more directly.
However, crowdfunding in this fashion is largely the domain of product-based businesses like fidget toy manufacturers or fitness band makers.
A service-based local business with a common business model, such as a health club, has virtually no shot at breaking through to big funding totals on crowdfunding platforms. You need to incentivize people to give you money on a crowdfunding platform, and if you can’t deliver anything unique to anyone’s front door, they’re unlikely to back you.
What’s left? Taking peer-to-peer platforms and crowdfunding platforms out of consideration only removes a handful of options. There are still thousands of other alternative lenders in the United States, most of which look and operate rather similarly to banks.
You might have already gotten emails or physical mailers telling you how much your business is “pre-qualified” to borrow from one of these thousands of alternative lenders. Alternative lending has become quite popular with small business owners in the United States, and successful alternative lenders tend to be quite aggressive with their marketing.
You can apply for loans with most of these alternative lenders online. Once you’ve submitted your information, the application process is pretty similar to what you’d go through a bank.
The main difference between banks and alternative lenders is the type of business they typically work with.
Banks (and the SBA) prefer to fund credit-worthy borrowers with established financial track records. Alternative lenders often fill in the gaps for business owners with weaker credit histories and/or less time in business than banks will accept. The upside to alternative lending is pretty clear for newer businesses, and for entrepreneurs with underwhelming credit scores.
Businesses facing an immediate cash crunch may also benefit from the faster processing time -- days to weeks compared with weeks to months for bank and SBA loans. However, the downside to alternative lenders tends to involve higher fees and interest rates, as well as more cramped repayment schedules, than similar bank loans.
If you’re going to pursue funding from an alternative lender, make sure you have (or can use the funds to acquire) the means to pay off your debt without allowing your growth to stall out or reverse. There’s no point in getting a loan that won’t help you grow by more than your costs in fees and interest.
We’ve covered most of the early-stage necessities for an aspiring health club through these first 14 sections. Now it’s time to change gears a bit.
The rest of this series will cover, in greater detail, tips, tools, and tricks for managing every aspect of your growing health club business. We’ll also look at a few traps you’ll want to avoid to keep your health club profitable and your members happy.
15: Know your numbers
Managing a health club successfully requires you to wear many hats.
You’ll need to know how to hire people, how to make a sale, how to do some accounting, and you might even have to learn a bit about upholstery if someone cuts a hole in the seat on one of those new Pelotons you decided to pick up.
You might not necessarily have to do everything yourself, but a basic understanding of every cog in your business machine will go a long way towards its long-term growth and success.
You can start with some basic terminology.
Here are 13 metrics which can help you assess your club’s recent progress, or lack thereof, and which can also help you plot your future course as well:
1. Total clients and/or members
A well-managed facility always knows how many paying customers it has. This is only a starting point, but your member total will be a key denominator in many other metrics used here. It’s critical to count every member, so you can make every member count!
2. Conversions and/or memberships per month
This metric, and the next, are two key indicators of your sales and marketing success. We recommend clubs (and businesses in general) focus on conversions rather than leads because it won’t matter how many leads you get if you can’t turn them into paying customers.
3. Member or client acquisition cost (CAC)
To find client acquisition costs or CACs, start with all the money spent on every activity directly related to getting people to sign up. This can mean marketing and promotional campaigns, sales compensation (commissions), sponsoring local youth sports teams, etc. If it gets them in the door, count it as an acquisition cost.
Divide all those costs by the number of new members or clients signed up during the same period. Now you’ve got your CAC on a per-member basis, which is a more accurate way to assess your spending than the overall total.
4. Usage rate
This metric is key to tracking member and/or client engagement. It shows how many times someone has used your club in any given period. High utilization rates indicate engaged members, and low utilization rates are a warning sign that they might be thinking of canceling.
5. Retention or churn rate
A well-managed facility knows that some membership cancellations are inevitable, but it also works hard to keep them to a minimum. A high churn rate or low retention rate indicates a disengaged base of members, which is deadly for a recurring subscription-like business such as a health club.
6. Retention duration
You obviously want to keep your members around as long as possible. If too many people are canceling early in their membership periods, it’s a warning sign to be heeded. Keep an eye on retention rates and durations, both of which should be calculated against your total member base. Always make sure your members have plenty of reasons to stick around.
7. Revenue per client or member
You should be tracking each member’s value to your club so that you can ensure you’re setting prices appropriately, and to identify opportunities for improvement. Track every sale to every member so you can see who’s spending and try to pinpoint who might be enticed to spend more.
8. Upsell revenue per client or member
Most clubs have a “base” membership, but also offer many opportunities to purchase additional products or services. The more stuff you can sell to each member, the more profitable your facility will be.
9. Client or member lifetime value (LTV)
Lifetime value, or LTV, tells you what each new member ought to be worth to your club over the expected duration of their membership. LTV is also helpful for assessing the success of a marketing or promotional campaign. If a new member LTV is lower than their CAC, you’re probably throwing money away on bad marketing.
10. Profit margin
A club’s profit is any money left over after paying all expenses. Boosting your profit margin simply gives you more money to work with. This can be calculated on a pre-tax and post-tax basis -- pretax for filing your taxes, and post-tax for financial projections and recordkeeping.
11. Cash flow
A club’s day-to-day financial health depends on its cash flow, which is simply a measure of the capital flowing into and out of a business. Positive cash flow puts money in the bank, and negative cash flow pulls it back out.
12. Revenue per square foot
This metric is simply a facility’s revenue divided by its total square footage. It can be improved in any number of ways, such as signing up new members, upselling them on new products or services, or reducing overall churn.
13. Return on investment (ROI)
ROI measures how much you make for what you spend. It’s most often used to analyze the effectiveness of your spending on sales and marketing. If you spend $1 to gain $2 in new revenue, you have a ROI of 2x, or a 100% ROI.
We typically express ROI as a percentage, because it allows for more nuance. You might have an ROI of 34% or 341%, or anywhere in between. As long as your ROI is positive, you’re moving in the right direction, but the larger you can grow this number, the better.
You can know all these acronyms, but you probably won’t really know your numbers unless you use software to track everything. In the next section, we’ll cover how to use several essential types of software to track, optimize, and grow your health club.
Next month: Part 6