No one needs to tell club owners that financing is tight right now, but that doesn't mean that good club operators with good credit and a strong history of success can't get loans today.

To find out which available options are better for club operators today, we turned to A.J. Mushtaq, chief financial officer of Titan Fitness Holdings, McLean, VA. Prior to the formation of Titan Fitness, Mushtaq was a principal at Titan Management Solutions, where he provided franchisees with advice on raising capital, implementing accounting systems and reporting structures, and devising financial and business strategies to maximize their goals. Titan Fitness Holdings has 14 clubs, making it one of the largest Gold's Gym International franchisees.

The best form of financing today, Mushtaq says, is your own cash flow. Lenders and investors are so tight these days that it's best to self-fund your club's renovation, new build or equipment purchasing needs. Unfortunately, not everyone has enough cash flow to do this, so club owners must consider getting asset-based or cash flow-based loans from conventional banks, the Small Business Administration (SBA), leasing/financing companies or investors.

For small to mid-sized clubs that need outside funding, the best form of lending available today is asset based, Mushtaq says. However, for asset-based lending, a company must have enough collateral (equipment or real estate) to cover the amount of the loan. The lender takes a primary position in the assets of the business so that if the business fails, the lender can sell those assets and recoup its money.

Cash flow-based lending, which is based on your earnings, is less common, and only a few institutions do that now with the credit crunch, Mushtaq says. In cash flow-based lending, the lender will look at your earnings before interest, taxes, depreciation, amortization (EBITDA), or free cash flow to business, before determining that they will lend you X times your EBITDA.

With cash flow lending, you need to have a minimum EBITDA threshold — typically, $3 million to $5 million of EBITDA. Cash flow lenders are typically large players, such as GE Capital, Churchill Financial and Merrill Lynch, and some larger banks, such as Wachovia and Citibank.

"I'm not sure if anyone is falling over themselves to do [cash-flow lending]," Mushtaq says about the current market.

To Whom Can You Turn?

Fitness facility owners can turn to several groups for funding: banks, the SBA, finance companies or investors. However, a bank with whom you already have a relationship is the best place to get an asset-based loan, Mushtaq says. Because those bankers already know you, they will look beyond the numbers. And if that banker is local, you are more than just one in a million applicants to him or her.

"They will fight on your behalf to get you a loan," Mushtaq says.

Another organization that club owners can go to for funding is the SBA, which is an independent agency of the federal government. Small business owners who meet certain criteria and who couldn't qualify for loans through traditional sources can get loans through the SBA, although the money actually comes from private lenders and other institutions. The SBA simply guarantees the loans.

Only businesses that meet a size standard, are independently owned and operated, and are not dominant in their field of operation are eligible for SBA loans. For more details on each type of SBA loan, go to the SBA Web site.

As with other loans, it is easier to get an SBA loan if the operators already have operations in place or if they are going with a recognized brand name for a franchising option, Mushtaq says.

Financing and leasing companies are another option for asset-based loans.

"They've historically been easier to work with even though you pay a higher interest rate," Mushtaq says. "I'm sure their business has changed as well, but these guys know the business. They have loaned to the health club business for years."

Equipment manufacturers with leasing arms also might have leases available on equipment to provide you with an asset-based loan, but you would have to have top credit and some collateral that they could loan against to make it attractive to them, Mushtaq says.

Picking the Right Investor

Investors are another way to infuse your business with the money you need. With investors, a club owner sells a certain percentage of the business to an investor or group of investors. Before going the investor route, you must do due diligence on the potential investors to ensure you pick the right financial partner.

"A lot of deals go south because the investor or group of investors is looking to bolt at the first sign of trouble," Mushtaq says.

Before making a decision on an investor, Mushtaq says you should consider several factors, including whether the investors are from the industry.

"Are they a gym operator or just purely a financial investor?" he says. "A gym operator is good because they can provide you with advice that you wouldn't have gotten otherwise because they are invested in you — but make sure they are a good operator. You don't want to take advice from a bad operator."

If the investor is a rich one looking to park its money in different investments, make sure that person or group has the wherewithal to guide you through further market turmoil, Mushtaq says. They also should have good banking relationships that you can lean on.

"You don't want to just look for the first person willing to give you money," Mushtaq says. "Look for the financial investor with great financial relationships and good financial advice because that's something you can get for free from them as they invest in your business. That could be invaluable in tough economic times because knowing more lenders — or finding the right lenders that are warm to you and investor contacts that would be warm to you — that's a great asset."

If possible, you should hire someone to represent you in negotiating a deal with investors.

"A lot of gym operators are smart guys and great operators, but when it comes to ownership and equity decisions, they are not up to speed on the best deal they can wrestle out of the investor," Mushtaq says. He recommends hiring a reputable broker or an investment banker if the deal is large.

"Those guys will fight on your behalf because that's what their commission depends on," Mushtaq says. "The more advice you can get upfront in this process, the better off you will be."

He suggests that club owners look for intangibles when it comes to investors: Who has the best contacts, best lender relationships and best business savvy that can provide you with sound advice as you move forward?

What Lenders Want from You

As club owners seek outside financing, they should make sure their financial house is in order, Mushtaq recommends. Before any lender will loan you money, they will look at your business and personal credit, so you should sign up for one of the free credit score services to find out your credit score. In addition, you should ensure that you pay your bank, your bills, your credit cards and your mortgage on time. You also need to ensure that your business has a track record that lenders can loan against, he says.

"Having liens against your business or against your personal credit is not good in these times," Mushtaq says.

The worst thing you can do is declare bankruptcy, Mushtaq says, because that will stay on your record for many years.

In addition, most lenders, particularly investors, will need to know the current value of your business, which means you must work with a legitimate firm to evaluate your club's worth.

To get in the door with a lender or investor, you'll need a business plan or a marketing plan, Mushtaq says.

"The more information you provide them in the current market environment, the better off you'll be," he says.

The business plan can be as simple as stating what your current business is, that you are looking to add another location, the site you've chosen and why you chose it, the demographic information, the traffic statistics and how many members you expect to have, then backing up those decisions with five-year projections on revenue and expenses. You'd also need to have an EBITDA model that tells you that anyone who invests in this business can expect to have a certain percent of return on their equity.

"It's extremely important to have this package ready and handy when you walk in the door," he says.

Seasoned gym operators may be able to put together business plans on their own, but newer operators should get help from a business broker or investment banker who is familiar with the industry.

"That's part of the value they will provide," Mushtaq says. "They will help you put together the plan so your odds of success increase."

After you get the loan, your relationship with your lender does not stop. Once you have the funding you need, you should maintain a close relationship with the bank or investor. Mushtaq recommends meeting with your lender once a quarter or once every six months. You should send them monthly financials so they know how you are performing and call them to explain the information.

"It's important to keep them abreast of any development with your business and to maintain a friendly relationship," Mushtaq says, adding that this will help you if times get tough for your business and if you need to go back to them in the future for another loan. "Obviously, gym operators look at statistics, but that's mostly top line revenue-type stuff. You also need to look at your bottom line to ensure you are providing investors with the return that they are asking for."

The difference between banks and investors are that banks are somewhat protected in terms of what they loan you, Mushtaq says. Banks are protected by the equipment or other collateral or personal guarantees. Investors don't have that. They are behind the lender in almost all regards.

When Difficulties Happen

If you start experiencing difficulties with your business, most bankers have plans in place to help you.

"These days, it's commonplace for banks to work out some arrangements with owners, but it won't come without penalties or a mark on your record," Mushtaq says.

Most banks are willing to restructure their loan with you if the alternative is that they are going to have to repossess the collateral and resell that, he says.

"It's to their benefit to work something out with you," he says. "Whether it's abated payments with a catch-up as times get better or some relief on the interest, they should be able to work with you."

If you go with an investor and the business begins having difficulties, you are a bit better off than if you went with a bank, Mushtaq says.

"Investors understand that they will only get what is left to distribute out of the business unless the business is sold," he says. "So if the business is not doing well — and after you make all the payments to your vendors, banks and other financial institutions, and there's not a lot of money left to distribute — the investors understand that. That's part of what they bought into. If the times are good and everybody is getting distributions, then everyone is happy."

Investors require a higher rate of return because they have less leverage as they invest with you, Mushtaq adds. They don't have any collateral other than the portion of the business that you sold them, and they are in second place to the bank or other finance/lease company that has first rights on any equipment or any tangible items that you own in the business. Because of that higher risk, investors require a higher rate of return, he says, and they often also have more say in the business.

"If you bring on an investor, and you want them to own 51 percent [of your business], you've essentially sold them control of your business because the majority owner controls the business," Mushtaq says.

If you have minority investors, you still control the business, but you have to negotiate at the time of the original deal how much say the minority investors will have in the business, he says. Many investors will try to get more voting control than their percentage of the company is worth, but a well put-together agreement will ensure that you marry up their ownership interest with their other demands.

The Final Say

Does one type of fitness facility have an advantage over others in getting financing? Not according to Mushtaq. He says that at the end of the day, success in getting financing comes down to economics.

"Whether it's a key-card club or 40,000-square-foot facility, it will come down to what your business plan says or what your financial model tells you because that's what someone is going to make a lending or investing decision on," Mushtaq says. "Where you will fail is if you don't have enough qualitative data to support your case."