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Child Care Loans

Pre-Qualify for a Child Care Loan

The types and options for child care loans are dependent upon the specific loan request being made. Financing has traditionally been fairly broad and can include conventional and SBA loans, assets based loans and other non-traditional funding options. There are various loan purposes to consider as a borrower depending on whether the daycare center owner is looking to purchase an existing business, obtain start-up financing for a new center, seek leasehold improvements, remodel, or acquire real estate. When it comes to financing day care center operators will face several decisions in regard to loan product and lenders to choose from.

Child Care Loans: Which Loan Product Is Right For Me?

There are several loan and funding programs that have been used to finance daycare centers, which can be structured as fixed, variable, or fixed to floating rate loans. Traditionally daycare centers have received fairly competitive child care loan rates and terms, with current interest rates generally ranging between 4.25 and 8.75 percent across most types of financing. The term and amortization is often structured anywhere between five and twenty-five years, depending on the assets being financed with the loan. Financing for hard assets such as real estate generally receive terms between fifteen and twenty-five years, while a loan for working capital and inventory could have a term of five to ten years. There are several loan products that borrowers should consider for daycare financing, including:

Conventional Loans

Conventional loans are typically made by community, regional and national banks and some non-bank lenders. These loans are not guaranteed by any third party and the bank or lenders assume the full risk of the loan. Therefore, credit standards are usually highest for conventional loans. Terms and pricing can be more flexible for conventional loans as lenders can price lower for stronger loan requests.

SBA Loan

The child care operator may want to look into the Small Business Administration's (SBA) 7(a) and 504 loan programs, for various financing uses. With an SBA loan a percentage of the full loan, typically 75% is backed by the federal government so lenders assume less risk on the loan. However, all lenders utilizing SBA loan programs have to adhere to stringent loan eligibility requirements and SBA Standard Operating Procedures for loan underwriting. This includes the terms and pricing for the loan. For the SBA 7a product, loan rates are priced using the Prime Rate plus up to an additional 2.75% - which is the maximum the lender can set the rate at. Lenders typically use variable rate pricing so as the Prime Rate goes up or down the interest rate on the loan will move up or down as well. Terms are structured based on the assets being financed.

Use the Fundability App see how fundable you are in the eyes of business lenders for child care loans.

Asset Based Lines of Credit

Child Care Centers may use asset based lines of credit for an array of business uses. Asset based financing for child care centers can be either revolving or term loans secured by assets such as accounts receivable, or real estate. For more on Asset-based loans click here.

Unsecured Business Line of Credit

Unsecured credit refers to loans or lines of credit where there is no collateral to back the loan. Although this type of lending is possible for daycare centers it is considered risky for lenders. The borrower's personal financial strength as well as the business cash flow needs to be strong in order to qualify for an unsecured line or loan.

Merchant Cash Advance

The merchant cash advance product is financing based on credit card receivables where the merchant cash provider will advance a loan based on historical credit card sales. This financing can only work for daycare centers that accept credit card payment. Merchant cash is considered short-term financing and can be funded quickly for businesses.

Seller Carry Financing

For buyers of an existing child care center it may be possible to negotiate financing with the seller. Instead of receiving the full purchase amount, the seller may be willing to finance all or part of the purchase price. In this scenario the buyer and seller negotiate the terms and interest rate of the loan. Typically sellers want to get paid out on the note within five years of the sale. One benefit of seller carry financing is that the seller will be supportive of the transition and should offer proper training to ensure that the buyer is successful taking the business operations over.

Credit Parameters for Child Care Loans

Credit parameters can vary across financial institutions depending on their appetite for daycare center loans. Many lending institutions look at Loan To Value (LTV) which is a measure of available collateral to support the loan. Lenders may opt to establish the loan amount as low as 55% to a maximum of approximately 90% of the available collateral. Debt Service Coverage (DSCR) is a metric assessing the available cash-flow from the business to cover loan payments. Lenders typically prefer to see a minimum ratio of 1.25X or 1.35X available cash to the annual requested loan payments. The higher the ratio the better, as lenders like a larger cash cushion should a business see a drop in revenue. The personal financial strength of the business owners will also be assessed by the lender. Lenders want to make sure that borrowers have enough cash to both inject into the deal as well as for any problems that might arise in the future. The personal credit of a borrower and how they have managed debt historically will be looked at by the lender through a consumer credit report.

Child Care Center's: Economic Impact

Over the past few decades, the number of families with two working parents has come to be the clear norm. In connection with this growth, the professional child day care industry has flourished. According to the National Center for Education Statistics there are more than 11 million children under the age of five in some form of childcare every week. The child day care industry represents $36 billion covering more than 500,000 businesses.

Parents have a number of options open to them ranging from home-based care, church and religious based programs, and center-based care facilities. Based upon a survey of children with working mothers, more than 58% are being cared for in Child Care Centers/Full-Day Preschool. In contrast, only 7% are at home with a nanny. This explosion in the education-based industry presents an exciting option for prospective business owners.

Child Care Center's: Common Compliance and Regulatory Issues

Because daycare centers are subject to regulatory oversight, lenders are keen to understand that the operator is in compliance with all relevant laws. For instance, state's typically require specific staff qualifications and program requirements as well as stringent health and safety requirements. Further, on an ongoing basis child care centers must adhere to a maximum child capacity laws. It is important to understand that should the owner go out of compliance, it could cause the borrower to be in a technical default with their lender.

Apply for a Child Care Loan

Securing financing for a daycare center depends largely upon the scale and purpose of the loan, but all such loans require comprehensive information on the business and the borrower - the loan application and checklist. This includes financial and tax records for the center, a detailed business plan and loan plan, projections of expected earnings, personal financial and tax records as well as resumes for all purchasing parties, and a listing of all the center's assets and relevant documents detailing any proposed transactions involving the daycare center.

You can apply for a child care center loan with one of the 5,000 lenders on BoeFly. A single loan request through BoeFly is the most efficient way to seek a daycare center loan. Many individual banks or lenders can start the loan process, but BoeFly helps daycare center owners by creating lender competition for their business, presenting an array of funding options, pricing and terms.

Ready to start? Contact 1-800-277-3158 for a free consultation.