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."

Want to use this article? Click here for options!
© 2012 Penton Media Inc.