SBA 504 loan helped transform preschool’s director into its owner

July 8th, 2013

SBA 504 loan helped transform preschool’s director into its owner

As published in the Wichita Business Journal.

In a recent article entitled: “From beginners to Bigshots”, Lori Tos, owner of the NorthRidge Academy, stated that the SBA 504 loan has transformed her from a director to a business owner in her passionate education industry.

Lori Tos has worked in Wichita child-care (at NorthRidge Academy) as a director for the last 5 years. In 2006, Lori approached the owner of Wichita child-care about buying out the business to set it on the right path and make her dream comes true.

Lori remembered that the funding processes with banks were not very smooth. She went to four banks, asking for funding, but all of them turned her down because they considered her business plan as too aggressive.

Eventually, Lori learned about the SBA 504 loan program which enabled her to finance at a fixed, below-market rate, allowing access to capital, with only 10% down of the equity payment. With the assistance from SBA, Lori was able to save the business and transformed it to NorthRidge Academy. Nowadays, NorthRidge generates $1.2 million annually. Lori said she will consider financing with SBA again, when she expands her business.

SBA 504 loan helped transform preschool’s director into its owner

Lori Tos knew it could be done, but few others believed her Wichita child-care center and preschool could bring in more than $1 million in annual revenue. So Tos set out to prove her doubters wrong.

It was 2006, and Tos, who majored in business in college, was in the process of buying New Song Academy, which she had led as director for five years.

Tos wasn’t happy with the direction New Song was going and she feared for its future. Owning the center would combine her love of working with kids with her business background. And it would give her the opportunity to set the center on the right path.

“I didn’t know how long the school was going to be here if I didn’t buy it,” Tos says.

She approached the owner about the possibility of buying her out. The two agreed on a purchase price, and Tos set out to secure the financing that would make her dream a reality.

But it wasn’t easy. Tos spent about a year trying to persuade banks to lend her the money to buy the center, which she was renaming NorthRidge Academy.

As the rejections mounted, Tos wondered if she would be able to put a deal together. She almost gave up. Tos applied for loans at four banks, and all of them were reluctant to lend her money based on what they saw as aggressive revenue projections.

But she stuck with it. And eventually she learned about the Small Business Administration’s 504 loan program, which helps entrepreneurs obtain financing for fixed assets with a 10 percent equity down payment. A lender issues a loan for 50 percent of the total, and a certified development company covers the remaining 40 percent

Tos and a silent partner were able to put together the down payment. Rural Missouri Inc., a leading 504 lender, became the development company. To complete the deal, RMI helped Tos find the perfect lending partner: Legacy Bank, which just happens to be NorthRidge Academy’s next-door neighbor.

“Legacy saved us,” Tos says.

Tos has a 20-year note with RMI and a 15-year note with Legacy. The SBA backed $1.08 million of the package.

Brice Malloy, vice president for commercial lending at Legacy, says the bank has a good working relationship with NorthRidge Academy.

He says Tos’ previous experience in the business, plus her passion for working with kids, worked in her favor. RMI, he says, brought the idea of making a 504 loan to the bank’s representatives, and they were willing to take a chance.

“That program gives the bank a good loan to value (ratio), and it gives the borrower a long-term fixed rate,” Malloy says. “She put together a group that turned her into a well-qualified borrower.”

Today, NorthRidge is thriving. Its 16,000-square-foot building is now home to 35 to 50 staff members and 180 children. It has waiting lists for every age group — as long as a year for infants.

And Tos says that’s all happened without any paid advertising, just word of mouth.

As for those aggressive revenue projections? Tos hit her mark in the first year and hasn’t looked back. Tos says NorthRidge’s annual revenue is consistently around $1.2 million — not because her rates increase, but because the center is always full. Teacher turnover is low, Tos says, and the business benefits from being near two major thoroughfares.

NorthRidge has 12 classrooms, a large gym and a full-service kitchen. It uses an academic curriculum in its classes and also offers music enrichment and physical education.

Tos says NorthRidge has outgrown its space, and she’s considering buying land for a new building or finding a way to expand at the existing location.

When that time comes, Tos says, she’ll draw on her previous experience with the SBA and may pursue a similar avenue of financing.