A New Alternative to Access Working Capital


Paul Bosley is the national marketing director for First Financial. His health club industry experience includes working for Titan Management Co., Healthclubexperts.com, Q Sports Clubs and Bally HTCA/Holiday Health & Fitness Centers. He has a bachelor’s degree in health science and recreation management and is studying to get his associate’s degree in accounting. He has spoken at the Club Industry and International Health, Racquet & Sportsclub Association conferences. For more information about leasing, please contact Paul at 800-956-7313 or by e-mailing [email protected].

With many health club owners unable to qualify for a traditional loan, accessing working capital is a serious challenge. A cash advance is one option that club owners can consider, as long as they are aware of its advantages and disadvantages.

Dan Lenchner of Merchant Cash and Capital manages a division of the company that specializes in health clubs.

“Health club owners, like most small business owners, are having a very difficult time attaining capital in these economic times,” Lenchner says. “Now, with a cash advance, club owners have the ability to access capital that could be used to meet payroll, acquire new equipment, pay taxes, open a new location, advertise or simply get through a slow period. There is no easier or faster way to access working capital.”

Since a cash advance is relatively new to our industry, many club owners are not familiar with this financial product. Simply put, a cash advance allows business owners to access working capital now in exchange for sales to be made in the future. A cash advance should not to be confused with a loan, a lease or a factoring agreement because the lender is purchasing your club’s future sales at a discount with no fixed repayment schedule.

Since the majority of club members pay their retail transactions and their monthly dues by credit card, this financial vehicle is perfect for our industry. The amount of the cash advance is based on your club’s average monthly credit card volume. Typically, the cash advance amount allowed will be any amount up to 125 percent of your club’s average Visa and MasterCard monthly processing volume. As an example, if your club averages $40,000 per month in MasterCard and Visa transactions, you may receive any cash advance amount ranging from $5,000 to $50,000.

What is unique to cash advances is that there is no fixed time or schedule of repayment and no fixed interest rate. Alternatively, a mutually agreed-upon fixed percentage is deducted from the club’s daily credit card batch. Therefore, the club is not writing checks and is repaying only a percentage of the MasterCard/Visa sales.

Some key benefits of cash advances are:

  • They do not require a personal guarantee.
  • The approval process is not based upon personal credit scores—a major criteria for lease and loan approvals.
  • The approval process is the fastest and easiest way to access working capital.
  • Cash advances are off balance sheet financing and do not appear on the owner’s personal credit reports or the company balance sheet.
  • As an alternative to equity financing, your company receives a cash infusion without soliciting new business partners.
  • The repayment agreement is a percentage of future sales, not a fixed payment. Most repayment agreements are for one year, but if sales are slow, your payment automatically reduces and the term to repay can be extended beyond a year.

Two down sides exist to cash advances. Until the future sales purchased is fully repaid, you can’t determine the interest rate you will end up paying. Since the club company is selling X amount of future sales for Y amount of an advance today, the loan term cannot be predicted (even though many are set for one year) because no one knows for sure how long it will take for those future sales to be generated. The repayment is based upon an agreed percentage of each future sale ranging from 10 percent up to 30 percent, and it continues until the cash advance amount has been repaid. Because cash advances are unsecured and the lender could lose some or all the cash advance amount if the club goes out of business before repaying, the lender is making a high-risk loan. That usually means the interest rate will end up being higher in the long run for the borrower.

Another caution on cash advances is that since the use of capital is totally unrestricted unlike a loan or a lease, club owners receiving cash advances should be discriminating with the use of funds. As with any debt instrument, the club owner should use the funds wisely and be sure that receiving a cash advance will improve the business. Like any other form of debt financing, the key to success in business is to use capital wisely to create profit and net income.

To qualify for a cash advance approval, a health club owner must have been in business for more than six months and must have accepted credit cards as a form of payment for at least three months. On a personal basis, the owners cannot have open bankruptcies within the past seven years and cannot have outstanding judgments or pending litigation. The underwriting process is not credit driven, which means that owners with credit scores of less than 700 are approved regularly.

As stated earlier, the application process is simple compared to applying for a lease or a loan. In order to apply for a cash advance, you need to provide complete bank statements and merchant processing statements for the last three months, a copy of your articles of incorporation, your driver’s license, your building lease agreement and a voided check. For transactions of more than $35,000, you need to provide a copy of your most recent tax returns or interim financial statements. Since the application process is simpler than with a lease or a loan, the funding can take place within seven to 14 days. In time sensitive business situations, receiving the funds quickly may be an important feature to the club owner.

Since the funding and repayment is conducted through your credit card terminal, your merchant account will be switched over to a new credit card processor. An additional benefit to your company is that your new merchant fees paid on MasterCard/Visa sales will probably be less than your current merchant account rates. As a result, your company will save money on all future MasterCard/Visa sales, which will add to your bottom line—a nice long-term benefit.

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