Advantages of Financing
As a funding solution for small businesses, financing offers a number of significant benefits to gym owners. In fact, 80% of businesses in the U.S. lease some or all of their equipment. Although financing may not be right for all businesses, at a minimum, it is a concept that every business owner should understand.
Conserve Working Capital
The ability to conserve cash to cover other business expenses is hugely valuable. Instead of depleting cash reserves to make a large up-front equipment purchase or to cover the cost of an expensive project, retain the option to invest in other aspects of your business such as adding additional personnel for expanding programs or investing in a new marketing plan to help grow your membership base. There’s also a lot to be said for having some additional cushion in the bank account should any unforeseen problems arise.
Predict and Manage Cash Flow Efficiently
Lock-in a fixed payment schedule for your lease and/or loan. This allows you to use your new equipment and/or upgraded facilities to increase membership and generate revenue without the lofty up-front out of pocket expense. Avoid the inflation risk in the future and budget what your monthly expense will be from start to finish.
In the U.S., a finance lease allows you to recognize the equipment on your balance sheet as if you purchased it outright with cash. You get to deduct the depreciation as well as implied interest for tax purposes. You can also choose to take advantage of the Section 179 deduction, in which a business can deduct the full purchase of price of equipment the year that it is initially leased which effectively lowers the cost of the equipment. Your accountant can further explain the tax advantages, but these options can greatly impact small business owners in a positive way.
Maintain Ownership of YOUR Business
In raising capital to undergo an expansion or open a new facility, it’s common to see gym owners give up a percentage of their ownership in the business to investors in exchange for funding. This is often viewed as a ‘cheaper’ source of money, since you are not necessarily required to pay interest on the invested capital. Of course, this doesn’t mean you aren’t paying for it elsewhere – particularly in the form of forgone future earnings of the businesses. Giving up ownership means giving up a share of the profits, and that can add up quickly.
“Is financing really worth it?”
Take a look at this example: let’s say your monthly membership rate is $150 and you financed the addition of a shower as well as additional equipment with a monthly financing payment of $450. If you can add more than three members with the facility upgrades and additional equipment, then financing was the right decision. With no large, up-front expense, you will cover your monthly payment by adding only a few new members – every member above that is additional return on your investment!
Section 179 Benefits
Section 179 of the IRS tax code allows a business to deduct the full purchase price of purchased or leased equipment for the current tax year from the business’ net taxable business income. In 2016, you can deduct up to $500,000 worth of equipment (that’s a ton of barbells, plates & rowers!). This incentive was created by the United States Government to encourage businesses to invest in new equipment and in their own business’ growth.
Instead of writing off the equipment through depreciation over the course of a few years (typically 3-5), business owners have the opportunity to write off the entire equipment purchase price up front, at one time. This is especially beneficial for those businesses who are leasing the equipment as they did not even have to incur the initial out of pocket expense to qualify for a sizable deduction. Some businesses may be surprised to find that the total amount of lease payments made the first year will actually be less than the tax benefit created through the Section 179 deduction.
*You should always consult with your qualified accountant when it comes to your specific business tax deductions. Additional information on business taxes and Section 179 can be found at www.irs.gov.