As a child care professional, you know that there is far more to setting up a daycare than playing with kids all day. These types of businesses require big capital for big purchases, which often require loans for child care businesses or daycare equipment financing.
No matter whether your needs for daycare loans are big, such as renovating a building and transforming your center—or smaller, like making sure your assistants get paid, there’s a capital solution that’s right for you. In this guide we’ll review the different child care business loan options, how to pick the right one, and the process for obtaining them. By the end of this piece, you should be able to figure out which of the many business loan options are right for you and your growing business.
The first step in understanding all of the options you have for daycare loans is understanding what your business’s needs are. What exactly are you looking to do with this capital?
Here’s a list of questions to ask yourself as you’re considering your child care business loan options:
Also extremely important are the questions that can either help or hinder your approval:
These last three questions are the key to business loan approval. But, if you had to isolate one as the most important, it’d likely be your credit score, since this tells the story of your history with debt (and, subsequently, whether lenders can trust you with their money). Have a sense of your number by monitoring your credit score and pulling your credit report for free before you start applying.
A good child care business loan is a loan that suits your needs, full stop. So, understanding what it is you need from the capital you’re borrowing is a huge piece of finding a good match. (Go back to those questions above and make sure you know the answer before you continue, trust us.)
A good daycare business loan is also one that bolsters your business and enables you to accomplish what you want to, which means getting a hold of enough—but not too much—capital. Otherwise, you’re in jeopardy of not being able to repay and having to default on your loan. While we’re talking about repayment, a good business loan also has terms that your company can realistically meet knowing your revenue expectations, seasonality, and cash flow patterns.
When looking through your child care or daycare business loan options, begin with what you hope to accomplish. If you have a few different goals you’d like to accomplish with your funding, you won’t want to take out any business financing that isn’t flexible enough for your needs. On the same token, though, many daycare center owners just need to finance one thing, and therefore, a more rigid financing option works for them.
You’ll also want to consider a few different options. You may not be eligible for the loan or financing option you want the most (an SBA loan is more difficult to qualify for, for example). But, by learning about your different loan options for your child care business, you might be surprised by some of the alternatives that are within your reach.
Now that you’re familiar with what you want to accomplish with this capital and where your business financials stands, let’s look through the top loans for child care businesses.
Daycare equipment financing is one of the far-and-away top options for child care businesses that are looking for a loan to finance specific purchases. As you know, there’s a lot of stuff involved in starting a daycare and keeping it running: furniture, mats, toys, computer systems, and so much more.
With daycare equipment financing, you work with a lender to secure funding just for the items you need to buy. You’ll submit a quote for the cost of the equipment you’re looking to buy, and if accepted, the lender will front you the money. You’ll pay back the loan in installments, plus interest, according to the lender’s terms.
The good news with daycare equipment financing is that people with less-than-perfect credit are still eligible. One reason why is because the loan is self-secured, which means that the gear your purchase with your equipment financing becomes the collateral for the loan. (And the open-market value of the collateral affects the interest rate on your loan.) You also have the possibility of being approved for these loans quickly, so if you need a loan fast, daycare equipment financing is a good option.
Been in business for a while and have stellar credit? You could be a candidate for an SBA loan, which are furnished by private lenders (often banks), and guaranteed up to 85% by the U.S. Small Business Administration. The government’s safety net on these loans enables lenders to offer preferred terms, including relatively low interest rates, high capital amounts, and long repayment terms. As you might expect, these loans are very competitive—which is why that great financial track record is so important to get approved.
Particularly, you’ll want to look at two programs. The first is the SBA 7(a) loan program, which is the most popular. This enables you to get ahold of working capital at a premium rate, structured as either a traditional term loan or a business line of credit. The second, the SBA 504/CDC loan, is specifically to purchase significant fixed assets, like a new building.
Depending on your goals, you’ll be able to figure out which is best for you. Working with a representative who really knows SBA loans can help, too, and give you a sense of whether you’ll be qualified. One note of caution: SBA loan requirements are very paperwork-intensive, so if you need cash fast, regardless of how good your credit is, SBA loans won’t be your best route.
If the idea of an SBA 7(a) loan is appealing, but you don’t have the business financials (or the time) to support your application, you may want to look at other traditional business term loans for your child care business financing.
We say “traditional” because term loans are likely what you think of when you imagine a business loan: a lump sum of cash deposited into your business bank account, courtesy of a lender. There are a few different kinds of term loans that many online lenders offer—short-term and medium-term—which have different repayment periods and structures. And you’ll be glad to know you can find much faster approval for these working capital loans than with SBA loans.
Is cash flow your biggest issue? For instance, do you ever struggle to pay your staff or worry that you won’t be able to afford an emergency should it happen? For businesses with thin cash margins, a business line of credit could be your most flexible weapon.
This kind of child care business loan enables you to draw against a line of credit to get the money that you need. In one sense, it’s like a traditional term loan because you work with a lender to get approval. In another sense, it’s like a credit card cash advance, in which you’re able to access cash against your credit line—except with way lower interest rates. The biggest bonus of this type of child care business loan is that you only pay interest on what you actually use, which means that if you only draw out a third of your line of credit then, you guessed it, you’re only paying interest on a third of your approval amount.
The flexibility is key with a business line of credit. Since you can draw against it as you need it, this financing can be a crucial tool for months when your enrollment is lower but you still have to pay the same staff and overhead expenses, for instance. It’s also nice for many business owners to have on hand in the case of any unforeseen costs—like when a child throws a ball through a window (oops!).
You can find approval quickly for this kind of loan—sometimes, in as little as one day. You may also be interested to find out that some business owners who already have other types of business loans are able to access a business line of credit in addition to their current financing without incurring the automatic default often common in loan stacking.
You may not typically think of a credit card as a financing solution, but for business owners who don’t have a lot of time-in-business or revenue history, they can be effective financing tools. Specifically, 0% introductory APR business credit cards.
These kinds of credit cards enable cardholders to spend on the card—interest free—for a select period of time. These 0% intro APR periods often last a year or longer, which means for that time you won’t pay any interest on the balance you carry. Of course, it’s not all upside; as soon as your intro period is done, an APR based on the market Prime Rate and your creditworthiness kicks in, so you’ll need to be sure you have a plan for paying off your purchases within the 0% APR introductory period.
But, as you do pay off your balance, you’re also building credit, which can be valuable information for lenders as you graduate into more traditional business loans down the line.
As you build out your daycare business, you’ll learn a lot—and one of those things is the kind of capital that you require on a daily, monthly, and annual basis. Part of being successful is being prepared, so don’t wait until you’re in a capital crunch to apply for daycare loans. Work with your accountant to know your numbers inside and out, and pay attention to trends in your financial statements, especially your cash flow statement and profit and loss.
Something else to keep in mind while you decide which loans for child care businesses are right for you: Even though child care is a business that’s needed no matter the economic landscape, seasonality does happen. Your trends may be different than other businesses, but if you take a look at your revenues and enrollments, you might find that you can spot patterns.
If you do, this is good to keep in mind when applying for loans; with seasonality, you want to apply at the very tail of your peak season, since you’ll have to show lenders several consecutive months of business bank statements. You want them to see you at your best, most flush with cash, so they’ll view your financial position favorably.
Besides that, remember to be diligent about pulling your documentation together in advance, especially if you’re looking to obtain capital quickly. You just might find that the business loan you want isn’t too far away at all.
Sally Lauckner is the editor-in-chief of the Fundera Ledger and the editorial director at Fundera.
Sally has over a decade of experience in print and online journalism. Previously she was the senior editor at SmartAsset—a Y Combinator-backed fintech startup that provides personal finance advice. There she edited articles and data reports on topics including taxes, mortgages, banking, credit cards, investing, insurance, and retirement planning. She has also held various editorial roles at AOL.com, Huffington Post, and Glamour magazine. Her work has also appeared in Marie Claire, Teen Vogue, and Cosmopolitan magazines.