How to Choose the Best Daycare Business Loan
- Loan Features: The first step is to evaluate each option based on its features, including loan terms, repayment optionality, and loan amounts. For example, if you need a long-term loan to pay for daycare renovations, you can eliminate lenders that offer only short-term financing.
- Application Process: You should also evaluate each lender based on how difficult their application process is. Some lenders may rely on a hard credit pull that damages your credit and cumbersome documentation requirements; try to avoid these if possible and focus on lenders who make it easy to apply.
- Interest Rates and Fees: Spend time looking at the various interest rates and fees charged by each lender. If you want to save money—or have extra money for toys, diapers, and snacks—work with lenders that offer competitive APRs and reasonable loan origination fees.
- Qualification Process: It’s also vital to check each lender’s qualification process, including the requirements for credit score, annual revenue, and time in business. If you just opened your daycare two months ago but the minimum requirement is 12 months in business, work with another lender.
- Customer Support: You must also make sure you have access to help when you need it. See if the lender offers support through multiple channels including access to a live customer service rep. It’s also helpful if there are resources available on the lender’s website to answer your questions, such as blog posts and FAQs.
- Online User Reviews: You can save yourself a lot of time and trouble by checking reviews on independent sites like Trustpilot. Read through comments other customers have left to see if the lender has a favorable reputation. If there are any red flags, move on to a different lender.
- Perks and Bonuses: You should also consider additional service offerings like payment flexibility, advertising transparency, and advanced technology. If you prefer making payments monthly because that’s how often parents pay for care, don’t borrow from a company that requires weekly payments.
What Are the Costs of Running a Childcare Business?
Opening a daycare is extremely rewarding, but it does come with its fair share of expenses. Some of the most common costs of owning and operating a childcare business include:
- Property Rental or Development: One of the biggest costs associated with running a daycare is acquiring property for your business. Regardless of whether you own or rent, the monthly cost could range between $1,000 and $4,000, depending on the size of the building and your location.
- Equipment and Supplies: You’ll have to purchase a wide range of equipment and supplies to outfit your daycare. For example, you’ll need furniture such as sofas, craft tables, cots, cribs, and changing tables. You’ll also need playground equipment, toys, books, games, and TVs for entertainment plus office equipment and cleaning supplies, too. In total, all of this could add up to $5,500 or more.
- Payroll: Chances are you won’t be caring for these children all by yourself; you’ll need to hire a few employees. Depending on how many people you hire, average local wages, and the number of hours worked per week, you could end up paying between $3,000 and $10,000 per month.
- Marketing and Branding: You’ll also need to spend some money on marketing and branding, especially when you first open your childcare business. To build a professional website and advertise locally, you’ll likely spend around $1,500.
- Business Registrations, Permits, and Insurance: Daycares need to pay for various registrations, permits, and insurance—it’s part of the price of doing business. These should cost you approximately $1,000.
How Can You Use Daycare Business Loans?
Most daycare business loans don’t impose any limitations on how funds can be used. This is good news, considering the widely varying expenses that a childcare facility can incur from month to month. Some of the most common ways daycare business owners use borrowed funds are:
- Purchase a Daycare Franchise: Buying into a daycare franchise can be a lucrative choice in the long run—parents are more likely to trust a well-known brand name as opposed to an independently run facility. But unfortunately, it costs a significant amount of cash to buy a franchise, which is why many daycare owners secure financing to cover the expense.
- Acquire an Existing Daycare Business: Another way to get into the childcare business is to purchase an already-existing daycare business from its current owner. This is beneficial because everything is already set up for you, but it often requires outside financing through daycare business loans.
- Buy Real Estate for a New Childcare Facility: Loans for childcare businesses can also be used to purchase space for a new facility. You’ll likely need a lot of funding to open your daycare, but thankfully there are lenders that offer high borrowing limits to finance your purchase.
- Make Renovations or Updates: Borrowed funds are often used to make renovations and update interior. If you’ve purchased or leased a building that was never used as a daycare before, it’s likely you’ll need to make some renovations. Even if you’ve long been settled in the same location, building updates and maintenance will be required from time to time.
- Purchase Equipment or Supplies: One of the most common uses for daycare business loans is to purchase equipment and supplies, such as a jungle gym, room dividers, cubbies, toys, blankets, diapers, highchairs, and kitchen equipment, just to name a few.
- Improve Cash Flow: Daycare owners can also used borrowed funds to take care of any shortfalls they may experience. For example, if enrollment drops over summer and winter vacation, you may need extra cash on hand to pay for expenses. Thankfully, there are loans available to cover the deficit and keep your business running.
How to Qualify for a Daycare Loan?
Qualifying for a daycare business loan may seem like a challenging task, but it doesn’t have to be; it just takes a bit of advance research and preparation to find the loan that best meets your needs. Here’s what you need to do:
- Check Your Credit Score: One of the primary qualifications that lenders check is your own personal credit score. While lenders can look this information up when you apply, it’s a good idea to know what your credit score is before you start the process. That way, you’ll know exactly which loans you qualify for and which ones you don’t before you start filling out applications.
- Create a Daycare Business Plan: It’s also recommended that you have a written daycare business plan, not only for loan applications but also to help guide decisions as your business grows. Most business plans contain information on your daycare facility, the services you offer, the cost of operation, a market analysis, and financial projections.
- Gather Your Documentation: The next step is to gather your financial documents, including bank statements, tax returns, and cash flow statements. Though documentation requirements vary from lender to lender, it’s wise to pull these together before you apply and have them on hand.
- Determine Your Loan Purpose and Amount: Before applying for daycare financing, you should have a clear purpose for the borrowed funds and know how much you need. For example, do you need $3,000 for playground equipment or $300,000 to purchase a daycare facility?
- Apply to Matching Lenders: Take some time to sort through the various daycare business loans available on the market. Compare your qualifications to those required by the lender and eliminate any you don’t qualify for. Focus on loans that match your desired loan amount and purpose then apply.
Types of Loans Available for Daycares
There’s a wide range of financial products available to daycare owners. Here are a few of the most popular options:
- Lines of Credit: A business line of credit is an excellent option for daycare owners because it gives them access to cash whenever they need it—and they only have to pay interest on the amount they withdraw.
- Term Loans: Term loans are great when you have to cover a large expense—like new furniture or playground equipment—and you need repayment spread out over a couple of years.
- Working Capital Loans: Working capital loans are a short-term funding option that can be used to cover any expense, big or small—from emergency roofing repairs to play mats and practically everything in between.
- Business Credit Cards: Though not technically a loan, many daycare owners like having a business credit card on hand to pay for everyday expenses like food, toys, and cleaning supplies.
- Commercial Real Estate Loans: Commercial real estate loans are the ideal option for daycare owners who are purchasing a new building or renovating an old one. These loans offer large borrowing amounts, lower APRs, and extended terms to make loan payments more affordable.
Grants for Daycare Business
In addition to traditional unsecured small business loans, daycares may also have access to additional funding through government and private-sector grants. These funds are often difficult to qualify for and involve a lengthy application process, but the additional financing may make it worth your while.
Government Childcare Business Grants
Childcare is an essential need in every community, which is why the government has established programs to encourage the development of additional daycare facilities. For example, the U.S. Department of Housing and Urban Development offers the Community Development Block Grant Program that funds projects designed to improve living and economic conditions, especially in low-income areas.
Because daycares provide a valuable service, offer employment opportunities, and improve local living conditions, they may qualify for this type of financing. These and other grants are usually allocated at the local level; visit the Childcare Aware of America website and select your state for more details.
Private-Sector Grants for Daycare Business
You may also be able to acquire childcare business grants through the private sector. However, it can be hard to locate information on these grants and learn about the application and qualification requirements. You may need to use a subscription service like Grants to Individuals to help you find the appropriate grants.
As a daycare professional, you know how rewarding it is to work with children; you provide an invaluable service that benefits families and the community at large. But operating a childcare facility isn’t cheap—it requires a lot of capital to cover both large occasional expenditures and small everyday costs.
The good news is daycare financing is readily available; there are many options to choose from, especially among online lenders. All you have to do is sort through the various options, evaluate their features, and find one that meets the needs of your daycare business.
*The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.