Child daycare has evolved into a prospering field. It is being driven by an increasing awareness of the importance of early-life experiences, as well as by economic factors such as the rising need for young professionals and reduced social service programs.
With some simple market research, business owners can find opportunities for expansion either at their present locations or through opening additional locations. This makes the financing options provided by the Small Business Administration (SBA) all the more important.
Finding Financing for Daycare Centers
The SBA Small Business Development Center cites data that show that the U.S. daycare market was worth up to $48.9 billion in 2017 with over 800,000 centers nationwide. The market is expected to grow by 1.9% annually through 2021, while the number of daycare centers will grow 1.2%. Employment in the field is expected to grow by 5% from 2014 to 2024—a figure that is in keeping with average employment growth.
A business owner needs to know the demographics of their local market to gauge the present and future needs of the daycare market. Neighborhoods with young families are centers of demand for child daycare. A business owner who is looking to expand needs to consider zoning and licensing requirements as well as the local competition.
On the upper end of the market, education is an important component of care even at the earliest ages. Franchises are highly visible in this market segment. Six of the Entrepreneur Top 500 franchises are childcare chains. These typically emphasize the educational and developmental aspects of daycare. The investment necessary to open one of these businesses ranges between about $250,000 and over $6 million. The comparatively high figures serve to emphasize how much daycare has diverged from “babysitting.”
There are abundant informational resources available to business owners in the daycare field. Besides SBA resources, Child Care Aware, a project of the U.S. Department of Health and Human Services, provides localized reference materials and detailed advice for business owners. The same agency’s Office of Child Care is a valuable source of information on federal regulations and licensing requirements, as well as funding opportunities for daycare operators, such as grants for serving low-income families.
Financing for Daycare Centers
Expansion of a daycare businesses could take several forms. Up-to-date teaching aids and clean, fresh-looking facilities are important for maintaining competitiveness, so building and equipment upgrades are often needed. Expansion of premises or construction of new centers is also common. Therefore, construction loans are used by daycare operators, in addition to mortgage loans.
Banks generally do not actively seek borrowers in the daycare industry and provide financing only to the best-qualified applicants. Franchisors often have third-party lenders that have a relationship with that can provide financing to new franchisees.
One finance company offers financing to applicants with good credit scores with 25-35% down payment, terms of 3-10 years and amortization of 15-30 years (that is, with balloon payments). Others suggest financing methods such as factoring and merchant cash advances.
SBA 504 and 7(a) loans are available for daycare center expansions as well, and are some of the best options for expansion. The 7(a) loan offers fully amortized financing with terms up to 25 years at rates slightly above the prime rate. The 7(a) loan often requires larger down payments than the 504 loan.
A 504 loan can be used to:
- purchase land or buildings
- construct, upgrade or renovate buildings
- purchase equipment with a service life of ten years or more
- refinance conventional debt
This means it can be applied to most of the needs of daycare business owners as they expand. The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender to provide a loan in three parts:
- The first is a loan from a conventional lender—a bank or a credit union—for at least 50% of the total project amount. The amount and conditions of that loan are determined separately, and it becomes the first mortgage. TMC can help match the borrower with the perfect banking partner for this loan, if requested.
- The CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Projects eligible for the SBA’s Green Energy Program can receive up to $5.5 million. This is the second mortgage.
- Then the borrower contributes 10% to the loan as down payment.
The 504 loan has a 10-year, 20-year, and a new 25-year term. It is fully amortized (so there are no balloon payments).
Incorporating energy efficiency measures in the construction of new premises creates financing opportunities for the borrower through the Green Energy Program. To qualify for the program, a project can:
- Buy or construct a building that consumes 10% less energy than your current location
- Make upgrades to the building you own to consume 10% less energy, or buy the building you now lease and do so
- Buy or construct a building that produces 10% of the energy it consumes or that produces fuel to reduce fossil fuel consumption, or buy equipment to do so at your current location
The Green Energy Program encourages energy conservation and the use of renewable energy by increasing the SBA portion of the 504 loan from $5 million to $5.5 million and allowing the borrower to fund multiple projects. The limit on total funding from the SBA Green Energy Program is $16.5 million. Incorporating green energy into your daycare center will not only provide you with extra financing, but it will help you stand out against competition as a health-conscious and forward-thinking institution.
The 504 loan provides accessible financing with flexible and cost-effective options designed to help your small business grow. Business owners seeking to expand their businesses should give it careful consideration.
You can find out more about using the 504 loan for daycare center expansion from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.