Can daycare & child care centers obtain business financing?
Daycare and child care centers can obtain a business loan for a daycare center. However, the business owner must qualify for funding. Most lenders will want to see that the borrower has a good credit score and a strong business history. They may also look at assets such as real estate and inventory or equipment. If you started your daycare out of your personal home and are ready to grow into a legitimate business, you may have to start with a personal loan to establish your business.
How does a daycare business loan work?
The way a daycare business loan works varies according to the type of loan you are getting but they have a few basics in common. First you will need to qualify by showing the lender that you have a good credit score, a strong business history and/or collateral such as real estate, inventory, and equipment. If you can’t provide this documentation, you may want to look into alternative loan options.
Once the loan is approved, you will need to pay back the money with interest. Payments are typically made on a monthly, weekly, or daily basis.
Daycare Business Loan & Financing Options
There are many business loan options available for all types of daycare business. Here are some to consider.
- SBA loans: SBA (Small Business Administration) loans are similar to bank loans in terms of interest rates, funding time, terms and requirements. However, the organization tends to be more forgiving of business owners that default on their loans.
- Lines of credit: A line of credit is similar to a credit card. However, they generally come with a much lower interest rate. In most cases, a business line of credit is backed by a valuable asset such as your home. Personal lines of credit are available too. In some cases, you can access a personal line of credit without an asset.
- Commercial real estate loans: Commercial real estate loans can be used to purchase any income producing real estate such as a hotel, apartment building, office building or a daycare center. It is a mortgage secured by a lien on the property.
- Term loans: There are many different types of loans that can be classified as a term loan such as a personal loan or traditional business loan. Term loans are available in one lump sum that is paid back over time. Term loans may also be referred to as installment loans. Essentially you are borrowing a sum of money to be repaid in equal monthly installments. If you use a term loan you should look for a fixed loan. Fixed loans have fixed monthly payments and a fixed interest rate. While variable loans may have lower rates, if the market changes, this can quickly change. In addition, your monthly payment can fluctuate, thus making the loan more difficult to manage.
- Business credit cards: A business credit card works like any other credit card, but it must be used to cover business related expenses. Paying for monthly expenses with a credit card can help you cash in on rewards and points. However, using a credit card to finance expenses that will take you a while to repay may not be the smartest financial decision.
- SBA 7(a) loan: An SBA 7(a) loan is specifically for small businesses. There is a standard 7(a) loan and a small 7(a) loan. The standard loan has a maximum amount of $5 million while the small loan has a max of $350,000. Other terms vary depending on the business owner’s situation.
- SBA 504 loans: SBA 504 Loans are long term, fixed rate loans that offer up to $5 million in funding. They are meant to support business growth and job creation. They are available through Certified Development Companies (CDCs), SBA’s community partner that regulates nonprofits and promotes economic development within their communities.
- SBA microloans: Microloans have a maximum amount of $50,000. They are meant to help businesses and certain non profit childcare centers start up and expand. The average loan is around $13,000.
Pros and cons of daycare center business loans
A business loan for daycare comes with its share of pros and cons. Here are some to consider.
- Provides the funding to launch or grow the business. Most business owners don’t have all the funding they need to get their company off the ground. A business loan provides them with the money they need to get started or take the business to the next level.
- You won’t lose equity in your business. Most business loans don’t require you to lose equity in your business. In addition, personal loans can be secured without putting up an asset or giving away equity in your business.
- Improves cash flow. Loans bring money into the business that can be paid off slowly. This provides optimal cash flow for the company.
- Interest rates. Loans come with interest rates meaning you will be spending more money in the long run. Interest rates can be even higher if you don’t have a good credit score and a strong business history. They will also compound if you are unable to make timely payments.
- Difficult to qualify. Because loans require a good credit score and reliable business history, it can be hard for new business owners to qualify. They can also take a long time to fund. If you are struggling to qualify for a business loan you should consider a personal loan to start.
What kind of expenses can daycare financing be used for?
A business loan for daycare center can be used to cover the following expenses:
- Purchase of a daycare franchise. Some daycares are franchises. If you choose to purchase a franchise location, you will need to pay the required fees.
- Employees. A daycare center will require reliable staff. With payroll being one of a business’s biggest expenses, you can see why funding may be necessary.
- Acquisition of an existing daycare center. If you are purchasing an existing daycare center, you may need a loan to pay the current owner the required amount.
- Supply purchases. A daycare center will require supplies such as toys, school supplies, first aid gear, desks, chairs and more. Financing can be used to stock your daycare with all the necessary supplies.
- Real estate purchase for facility. If you are buying a building to open your daycare center in, you will need to fund the mortgage or have cash to pay for the property. You may also need money to cover the rent and security deposit if you are leasing, funding can also be used for this.
- Renovations. It’s likely you will need to renovate the space to make it suitable for your needs. This is another major expense that you may need financing for.
- Marketing/advertising. Once the business is open, you will need to get the word out to draw in customers. This requires marketing materials, marketing software and a marketing team.
What is the average cost of a daycare business loan?
The amount it costs to open a daycare center will vary depending on the size and location of the building, how many workers you plan to employ and other factors. But generally, you will be spending between $10,000 and $50,000.
To determine the cost of the loan, you need to consider interest rates and how much you need to borrow. You can use a payment calculator to help estimate payments and total loan costs.
Which financing option is best for your business?
Finding the best business loan for daycare depends on your professional situation. You must think of how high your credit score is, what type of business history you have, how much you need to borrow and what you need the money for. Once you take all this into account, you can determine which loans you qualify for and what’s best suited to your professional needs.
What credit score do I need to qualify for a daycare & child care center loan?
If you have a credit score of 700 or higher, you should be able to qualify for just about any type of loan. If your score falls between 640 and 700, you may be able to qualify for a loan if you have strong business credentials to back you up.
If your score is in the 600 to 640 range, you may have to go with an alternative loan, such as a personal loan. Alternative lenders won’t require as high of a credit score and they won’t be picky about business history, but they can charge high interest rates. If your score is any lower than that, you may have trouble finding options.
What qualifications are required to obtain daycare business financing?
As previously mentioned, you will likely need a good credit score to obtain a business loan for daycare. In most cases, you also need to show a reliable business history. Most lenders will want to see that you have been in business for a year or two and that you make an income ranging from $50,000 to $250,00 a year.
If you are unable to show these credentials, you may be able to use assets such as inventory, equipment, or real estate as collateral. Alternatively, you may need to use a personal loan or line of credit until your business is established enough to qualify for a business loan.
How to apply for financing for your daycare and child care business
The first step to applying for a business loan for a daycare center is to determine the loan type and lender that’s right for you. Once you decide on your best strategy, you will need to meet or contact the lender. They will let you know what steps you need to take to apply and get approved.
Some lenders may offer online pre qualification which can help you shop offers and perks. While you are probably focused on a low interest rate and low monthly payment, perks such as funding times or flexible repayment schedules may be of value as well. You will want to compare all aspects of the loan to choose the loan and lender that is right for you.
A daycare center can be a very lucrative business venture, but you may need a business loan for daycare to get it off the ground. Now that you know the options that are out there, you can choose the one that’s right for you. Which do you think is best for your business?
Get prequalified for a personal loan in just 2 minutes with no impact on your credit score!