For many small club operators, money is often in short supply. And that is especially true for those just setting up their businesses. The option to lease equipment—especially if it is really a financing option that allows for the purchase of the equipment at the end of the lease—is an attractive proposal for many, including Tammy Wright and her husband, John. The two opened ABC Wellness and Fitness Center about six years ago in Waldorf, MD.
"It was cheaper for out-of-pocket expenses," Wright says. Putting just $20,000 down on an initial lease and then making monthly payments for three years was a better choice for the couple than spending $80,000 in one lump sum, she says.
The Wrights are not alone in making this decision. No statistics are available on how many fitness facility operators lease or finance their equipment, but estimates are that 60 percent to 80 percent lease some or all of their equipment, according to those who work on the leasing side of the business.
Leasing and financing deals were more abundant prior to the recession when lending policies were looser, says Joe Schmitz, president of F.I.T. Leasing, Garden Grove, CA. During the recession, the requests for financing increased, adds Lucian Rasmussen, director of leasing for Precor, Woodinville, WA, but the ability to lend was lessened due to tighter lending policies.
Lending has gradually loosened again, but Schmitz says it is still tight compared to the mid-2000s. Club operators also quit buying equipment during the recession as they slowed expansion plans and held onto existing equipment longer, which meant fewer of them needed leases and financing.
"We are seeing more existing club operators starting to replace older equipment," Schmitz says. "We are seeing a small uptick in new businesses—but not much."
The decision to lease or buy often is based on whether club operators have cash flow, but even if they have the cash, the decision may depend more on their philosophy about managing cash flow, Schmitz says.
"Some people want to own everything, so they pay cash for everything," Schmitz says. "Some people who are club owners say, ‘I don't need to own equipment; I need to use equipment, so I will lease my equipment and use my cash in ways that will generate new revenue like marketing.'"
About 70 percent of leasing in the fitness industry is really just a form of capital financing, Rassmussen says. Most leases tie operators into a three- to five-year contract in which they are financing anywhere from 80 percent to 100 percent of the equipment with the ability to buy it at the end of the lease.
The Wrights' Plan
That is how the Wrights' plan is set up. The couple did a finance deal that allows them to lease their equipment for three years and then buy it for a dollar at the end of the lease.
"At this point, we just want to pay it off and have that money in our pocket," Wright says. "It was a little over $2,000 [per month], and that's money that we won't have to worry about putting out. And we'll just switch out one piece here and one piece there as it needs it."
The Wrights' 5,000-square-foot facility offers memberships, one-on-one personal training, Zumba and boot camp classes for its approximately 200 members. The facility has about 25 to 30 pieces of equipment plus accessories, which they purchased.
Another plus to leasing for the Wrights was that the lease came with the option to return the equipment or redo the payments if they could not afford it, Wright says.
However, leasing may not be the right fit for everyone.
"We look at leasing at least once per year," says Erica Smith, facilities director for Gainesville Health and Fitness' three clubs and two physical therapy centers in Gainesville, FL. Smith gets bids from vendors each year to ensure that purchasing is still the best option for the company.
"Every time, it has been less expensive for us to buy in the long run," she says. "It doesn't make sense for everybody. For us, where we can put the money out front, it makes more sense [to buy]."
Because Gainesville can typically buy its equipment outright and usually purchases a large order at one time, the equipment is often cheaper than doing a finance deal, but that is not the biggest reason for purchasing rather than leasing, Smith says.
"One of the big things we consider over money is down time," Smith says. "We call it turnover days. From the moment that the machine is down until it is back up and running, how many member days have we lost?"
Gainesville does all maintenance in-house. Smith computes how much it would cost the company to wait for a service technician under a lease agreement rather than fix it in-house.
And because Gainesville maintains its own equipment, Smith often can negotiate better equipment purchase terms with manufacturers, including deleting the three-year labor warranty and extending the parts warranty from the typical three years to a more generous five years.
Smith has built a system to track the mileage, down time and repairs on each piece of equipment. She determines when it is time to replace equipment based on how much it costs the company to maintain it.
"Once it hits a certain point of being not cost-effective for us to keep it, that's when it triggers in the program that it is time to get rid of these pieces of equipment," Smith says.
This kind of tracking and maintenance system may be beyond the ability of some smaller clubs, just as purchasing more than one or two pieces of equipment at a time is beyond their ability.
Wright says that any future equipment orders of more than $20,000 will be leased again so that the ABC Wellness cash flow can go toward operational expenses and possible future expansion rather than toward equipment.
To Lease or To Buy?
REASONS CLUB OPERATORS LEASE EQUIPMENT
They do not have the cash flow they need to purchase equipment.
- They want to spread the cost of the equipment over time.
- They want to preserve cash for things that could bring in more members, increase profits and allow the company to grow faster.
- Their business structure is set up so that leasing allows them some tax benefits.
- They plan to swap out equipment every three to five years and want to keep equipment under warranty during the term of use.
- Leasing rather than getting a bank loan can help manage cash flows since the monthly payments for leases are consistent while bank loans can be based on a variable interest rate, which means the monthly payments could fluctuate.
REASONS CLUB OPERATORS BUY EQUIPMENT
- They have the cash on hand to do so.
- They do not want a monthly payment.
- They hold onto equipment for longer than the traditional three to five years and are less concerned about keeping equipment that is only under warranty.
FACTORS THAT DETERMINE FINANCE TERMS
- Business and personal credit of the club owner(s). Better credit equals a better deal.
- Whether the business is a start-up or existing business. Existing operators have a track record while start-ups are unknown risks.
- The size of the transaction. A bigger transaction will cost more overall but less per thousand.
THINGS TO WATCH FOR WHEN LEASING
- Ensure you are working with a reputable leasing/financing company by asking around and checking with the Better Business Bureau.
- Read your contract completely to ensure it does not contain hidden fees.
- Know what will happen at the end of the lease. Will you have the option to buy the equipment? If so, will it be a dollar buy back, a fair market value purchase or a residual? Are you responsible for returning the equipment at the end of the lease?
- Be certain how and when you must notify the leasing company at the end of the lease that you are returning the equipment or that you want to buy the equipment. Leasing companies often require a 30- to 60-day notice. If you fail to do so, you could be charged for another year's lease.
- Reserve money for the shipping freight on the equipment, a cost that usually is not included in the financing.