Starting a float center isn’t an inexpensive business opportunity. Depending on the type of float tanks you choose, size of your retail space among other factors, a center can cost between $65-100k per room to fully set up. While centers have started for less money up front, the cost of frequent repairs from salt damage and cutting corners during construction will cost more money in the long run.
According to the 2014 State of the Float Industry Report, over 43.1% of the future float centers said they were going to fund their business through bank or investor financing.
Before then, 81.3% of the existing centers said they had self funded or sought the help of family and friends to get started. That’s a significant shift in where future float centers plan to acquire their startup capital.
Regardless of the path to financing, before most float centers open their doors, they come up with some version of a business plan. If a float center is going for bank loan or outside investor, they WILL need a professional business plan.
Even with a professional business plan, not everyone gets financed.
Most centers will use their business plans to seek outside investment, often times from friends & family or less often from an angel investor or venture capitalist (VC). Even less often from a bank.
Angel investors & VCs are less common sources of float financing primarily because they want to see a huge return on investment for the money they put in. If a VC provides $400K to start a center, they’ll want to see at least 2.5X a return. Cutthroat investors will want a 10X return. Centers with less than 4 tanks will have a hard time generating the income to make an investor happy within a reasonable amount of time.
It takes regular networking within the right business circles in your community to meet with Angels & VCs. Finding professional entrepreneur organizations is a good start to getting to know the right people. Building a relationship with a high net worth individual takes a long time to develop. First work on educating them on how fast the industry is growing, then explain how you plan on being a part of that growth.
“If a small business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with one of the many registration exemptions under the Securities Act. Registering an offering with the SEC would make your company a public company (source: SEC.gov).” Of course, there are exceptions to the rule. It’s best to work with an attorney experienced in securities any time you’re dealing with private investor money.
Friends & Family are commonly the more forgiving investors. They might be the easiest to convince, but those arrangements can get messy quick as they often want a hand in the business is operated. Having a “family business” can be a great experience, but just because the personal relationship started out as casual, the business relationship should remain professional. Be sure to get all organizational agreements in writing and have a plan in place to deal with any conflicts.
There are also government restrictions on how many non-accredited investors your company can take on. When acquiring money from a non-financial institution it’s best to take money from those who can afford it and those who can offer experience in running a business (sometimes called “smart money”).
Getting a loan from a bank to fund a float center is probably the most difficult method of financing around. Banks are only concerned about getting their loan paid back. Depending on the economic conditions, the criteria and interest rates for a bank loan can change frequently. A brand new float center is considered a “startup” which is the most riskiest type of business, and they aren’t loaned to unless a couple of things fall into place.
FIRST, the person has to have excellent credit AND THEN, more cases than not, also have a large piece of collateral (like a house) which the bank can take if things don’t work out for the business.
They also have to provide assurance that they know how to operationally run a business. Banks, much like typical investors, lend to “the person” more than they do the idea of the business. Again, it’s all about getting paid back. They want to loan to someone who can prove that they can generate revenue. The team at Float Tank Solutions often joins up during this step to help future float center owners with our consulting and apprenticeship program. Those programs are designed to provide information to help start and grow a float tank business. If there is little business experience present, it helps to show that you have a team of consultants, mentors, and advisors to lean on.
The most likely way to get a loan from a bank is working with a local SBA office and apply for an SBA/Government backed loan. These loans have a higher interest rate to pay back (approximately 5% above prime), but if the loan defaults, the government will provide the banks with up to 75% of the loan amount. The person who takes out the loan still on the hook to payback the money, but the banks have more of a guarantee to get their money back.
We’ve already provided the groundwork in our float center business plan to provide industry information as well as our private financial statements showing the potential of growth using real world numbers from our shop, Float On, in Portland, Oregon. Working with a local SBA can also help refine our business plan to include local demographics and other information that applies to your area.
There is no one correct way to finance a float center. In fact, you can have a variety of the methods stated above as well as a few other sources of startup financing into the mix. If you can find a way to bootstrap your float center and operate with a smaller center than planned, loans & investments can become easier to come by as your business matures past the first couple years.
For banks, your expansion can be considered an equipment upgrade. These loans often come with a lower interest rate and rarely require major collateral. When it comes to private investors, proving that you have a viable business puts you in more control than if you were borrowing from day one. In most cases with a proven business, you can negotiate give up a smaller chunk of the company for the same amount of money.
This is a topic that can go MUCH deeper than what we’ve shared. If you feel financing your float center will be your biggest obstacle to opening, study up! Discover the viable options and you may uncover some alternative paths to raising money. There are plenty of business podcasts, books, and blogs where you can acquire a basic foundation of funding a startup. Using your new found knowledge, start having discussions with people in your business community. You may come across the right person who can introduce you to your future funding source.
If you have any questions about business plans or starting a float center, we’d love to help!