Starting or growing a daycare business can cost thousands, or tens of thousands, of dollars (or more) depending on the size and type of daycare business you run. Financing can help you start or expand your daycare business without having to drain your personal savings or find friends or family willing to lend you money. Learn how to identify and get the right type of financing for your child care business. 

How daycare financing can help your business

Financing for your child care business can provide much needed funds to grow. There are many expenses involved in starting up a childcare business, or expanding a current one. Cash flow may be uneven as  enrollments fluctuate. 

Overall, however, the outlook for daycare businesses is promising. According to an IBISWorld, the market size, measured by revenue, of the day care industry is $54.1 billion in 2021. Although the industry experienced setbacks during the pandemic, many families are looking for high quality child care.

Financing may be used to: 

• Acquire an existing daycare business
• Purchase a daycare franchise
• Purchase real estate for your daycare facility
• Renovate or retrofit a location
• Purchase supplies
• Manage cash flow

Types of financing options for child care businesses

Fortunately there are many types of financing that may be available for your business, whether its a for-profit or non-profit childcare facility. 

Lines of credit

• Flexible
• Only pay interest on amount borrowed

Every established daycare business owner should consider a line of credit. It will provide much needed cash flow when unexpected expenses arise, or when revenues temporarily fall short. With a line of credit, you only borrow the amount you need (up to your credit limit) and pay interest on that amount. If you have been in business at least a year (ideally, two), can demonstrate healthy revenues and have good credit, consider lining up a line of credit before you need it.

Term loans

• Good for specific projects
• Periodic payments
• Rates vary

Need to add new playground equipment? Buy supplies for expanded enrollment? A term loan may help you pay for those items over time. These loans are good for financing specific projects. Similar to a line of credit, you’ll likely need to show at least a year or two in business, good credit and solid revenues. But if you do, a term loan can offer predictable payments for expansion. 

SBA Loans

• Excellent rates and terms
• Good credit generally required
• May be available to startups

SBA guaranteed loans are popular for their low interest rates and affordable repayment terms. The U.S. Small Business Administration guarantees small business loans made by participating lenders so you will go to a lender, not the SBA, for one of these loans mentioned here. (Only disaster loans are made by the SBA.) There are a number of SBA loans that may be appropriate for your business. Keep in mind that generally SBA loans are not available to nonprofit businesses. (Exceptions were made for EIDL loans and PPP loans due to coronavirus.)

SBA 7(a) loans

SBA 7(a) loans are the most popular SBA lending program, and loans of up to $5 million are available. Funds may be used for working capital, real estate, equipment, or even refinancing certain debts. Interest rates are low and repayment periods are typically 10— 25 years. 

There are other loans under the 7(a) program umbrella that go up to $350,000; specifically  7(a) Small Loans and 7(a) Express loans. Some lenders make SBA loans to startup businesses, but many prefer to work with established businesses.

SBA 504 loans

Often used to acquire or expand real estate, these loans may be helpful for daycare businesses looking to acquire or expand their facility, including acquiring or renovating a facility or acquiring equipment such as playground or classroom equipment. They typically involve a loan for 50% of the project cost from a third party lender, 40% from a Community Development Corporation (CDC) and a 10% owner equity contribution. New businesses will typically have to contribute more toward the project cost. 

SBA microloans

Microloans (very small loans) of up to $50,000 are available from participating lenders (typically nonprofit Community Development Financial Institutions) under this program. The average loan size is closer to $14,000. Because of the relatively small loan amount these loans may be most appropriate for home-based daycare businesses; however, that’s certainly not a requirement. Lenders who make these loans may be able to accept less than perfect credit or may lend to younger businesses.

Commercial real estate loans

• Larger funding amounts for real estate acquisition
• Strong borrower qualifications required

If your business is looking to acquire, renovate or retrofit property, you may need a commercial real estate loan. The terms of these loans will vary greatly by lender. 

Business credit cards

• Available to startups
• Only pay interest on amount borrowed
• May help build business credit

Business credit cards can be a safe and convenient way to pay for items you need, and to earn rewards in the process. But they can also offer an affordable line of credit that can be especially helpful to child care providers who can’t qualify for a small business line of credit, including startups. Don’t worry if your business doesn’t have strong revenues yet; if you are self-employed you may generally include income from all sources on your application.

Choosing the right financing for your daycare business

To choose the right type of financing for your daycare business, you’ll first need to assess how much you need and how you’ll use the funds. Long-term financing such as SBA loans or certain term loans is best suited to larger projects with a high ROI over time. Short-term financing is best suited for cash flow gaps where you can repay the funds quickly. 

Of course it’s also important to understand what types of financing you qualify for. Startups will have more limited loan options than those that have been in business for at least two years with strong revenues, for example. Daycare business owners with good credit will have more options than those with bad credit. 

How to apply for financing for your child care business

You can apply for financing through your local bank or credit union, an online lender, or a broker or marketplace that helps connect you to various lenders. Make sure that whatever option you choose you understand the costs involved, and that you work with a trustworthy source that has your best interest in mind. Small business lending is not as heavily regulated as consumer lending, and there are predatory lenders who will take advantage of unsophisticated borrowers. 

The application process itself will vary depending on the lender and type of loan, but will usually involve a credit check (business or personal), and documentation of revenues in the form of bank statements and/or tax returns.

How to qualify for a daycare loan

Most lenders will focus on three main factors when evaluating your application for financing: revenues, credit and time in business.

First though, it’s extremely important that you set up your childcare business properly. A nonprofit business may be eligible for grants that some for-profit child care businesses may not qualify for. When it comes to financing, some types of loans such as many SBA loans, aren’t available to nonprofit organizations. So choose your tax structure carefully.

In addition, you’ll want to operate under a formal business entity, such as an LLC or S Corp. From a liability perspective, this can be extremely important. But it also matters from a financing perspective as some lenders simply will not lend to unincorporated sole proprietorships. 

Check your credit

Lenders may check your personal credit as the owner-operator of the business, the business credit of your daycare business, or both. You should be fully aware of your personal and business credit scores, and monitor both on a regular basis. (If you haven’t done so already, learn how to establish business credit for your childcare business.) 

Know your numbers

It’s a given that you must operate your business using a business bank account and not a personal account. This is true even if you operate a home-based daycare business. Many lenders will require business bank statements to evaluate your application. 

Make sure you set up a solid bookkeeping strategy from the beginning and work with an accounting professional who can help you understand what those numbers mean. The best types of financing may require up to date financial statements. 

Create a daycare business plan

If you are thinking about owning a daycare business it’s essential that you create a detailed business plan. Bplans offers detailed information about creating a business plan for a child care business, and your local SBA resource partners— Small Business Development Centers, SCORE or Women’s Business Centers, for example— can help for free. 

Remember to research and understand licensing, insurance and safety requirements. You’ll also want to make sure you plan for emergencies, such as when you or staff are out sick, or when children under your care fall ill.

A childcare business can be extremely rewarding and fill a crucial need in the community. Affordable financing can help you focus on what you do best: helping to nurture and grow the next generation.