More than half of U.S. states require health clubs to have a health club bond in order to legally operate their business. This unique type of surety bond is designed to protect the customers of these health clubs. Keep reading for more insight into how health club bonds work, why they exist, and how to avoid having claims filed against yours.
Usually, health club bonds are required on a city, state, or federal government level in order to obtain the business license they need to run their health club business above board. They have to keep this bond up to date to remain in business. You may sometimes hear health club bonds referred to as fitness center or gym bonds.
A health club bond guarantees financially that any members of the health club will get a prorated refund if the health club bond they belong to were to ever go out of business. That way, the club members didn’t pay for a membership they couldn’t utilize. This is especially helpful for consumers who pay for annual memberships.
Health club bonds—like all surety bonds—involve three parties.
The principal: This would be the health club owner who purchases the bond.
The obligee: This is the government agency that requires the health club bond.
The surety: This party is who issues the bond and pays out claims.
While the surety initially pays out any claims filed against the health club bond, the principal will need to pay them back for the claim as well as for any losses, fees, or court costs associated with the claim.
To better understand how a health club bond works before you buy one, it’s worth knowing these terms.
Bonding capacity. This is the maximum amount someone can claim against the health club bond. If the maximum bonding capacity is $15,000 then a claim can’t be filed for more than $15,000.
Bond premium. How much the principal will spend on the bond is known as the bond premium.
Bond term. How long the surety bond is active is referred to as the bond term.
So, what exactly is a health club and how can you tell if your business requires a health club bond to operate? All states that require this type of bond have varying definitions of what they consider to be a health club. Generally, health clubs are businesses that provide members with access to a facility for exercising—picture gyms and fitness centers. These clubs don’t have to exclusively offer fitness training.
Here’s a few examples of the types of businesses that may be considered a health club and require a health club bond.
Even personal athletic trainers who have their own facilities may require a health club bond to become properly licensed.
Of course, no business owner plans to get out of business, but they do need to have a plan in place in the event that day ever comes.
The easiest way to avoid a claim against a health club bond is to simply have a process in place for returning membership fees in the event you go out of business. If a health club collects membership fees up front, then they need to have money set aside to make refunds if necessary. Because of this, the majority of states that require health club bonds actually require that health clubs hold unearned funds (aka funds that pay for the customer to gain future access to the facility) in an escrow account to ensure club members will actually receive a prorated refund if the health club goes out of business. Even if this isn’t legally required in your state, it’s a good idea to follow a similar process to avoid having a claim filed against your health club bond.
These refunds are prorated. So for example, let’s say a health club collects their membership dues on the first of every month and they unexpectedly shut their doors for good on the 15th of the month. They would only have to refund the remaining 15 or so days of the month. If however they collect membership fees annually or quarterly, they would likely need to make much bigger refunds.
How much health club bonds cost (aka the bond premium) can vary greatly depending on a few factors including the bonding amount required by your state, your business finances, and your personal credit score. Usually, health club bonds cost between 1.5% and 7.5% of the bond amount. For example, if the bond amount is $10,000 in your state and you are charged a 3% rate, you would pay $300 to secure your health club bond.
Generally, the better your personal credit score is, the less you’ll pay, so it can be helpful to work on improving your credit score before you open your health club and apply for a health club bond.