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.

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