Caring for the next generation: Everything you need to know about financing a child care center business.
Child care centers are projected to keep growing over the next few years. Because of this, they’re a solid option for people looking to become small business owners. Lenders are likely to view this investment favorably, meaning you may find it easier to get a loan and purchase your very own child care center.
Our guide covers the expenses to consider and where to look to find funding for your venture.
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How can I finance the purchase of a child care center?
Outside financing will likely be necessary whether you’re starting your business from scratch or purchasing an existing business. Here are three top options to consider:
- SBA loan. The Small Business Association has loan options available for people who meet its strict eligibility criteria. In exchange, up to 75% of your loan is backed by the government, lowering your interest rate significantly. This is a good choice especially for business owners looking to expand to a new location and cover construction costs.
- Term loan. A term loan can cover just about anything — from purchasing your facility to buying toys and furniture. These come from a variety of lenders and have a slew of unique features, so compare your options carefully.
- Seller financing. Rather than financing a child care center upfront, you could negotiate with the seller to pay them back over a set period of time. However, many sellers will likely prefer a lump sum payment at the time of sale.
Financing to cover operating costs of an existing child care center
A business line of credit is a suitable option for flexible financing. With a line of credit, you can draw up to your approved credit limit as needed and repay the amount back over an extended period of time.
For one-time large purchases of things like new furniture, you may want to consider an equipment loan that’s secured by collateral.
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How do lenders evaluate child care businesses?
A lender determines the value of an existing child care business by calculating its capitalization, or cap rate. This is similar to how most commercial properties are valued. The cap rate considers the center’s return on investment (ROI) by looking at a two-year average of its net operating income (NOR). The cap rate also takes into account recent sales of similar child care centers in the local area.
The difference between a child care center and a daycare center
These are generally regional terms, but ‘child care’ is a more inclusive term of different types of centers. It’s more commonly used by care professionals. This is because not all child care occurs during the day, and ‘daycare’ tends to imply more informal care.
Because of the educational services many providers are giving clients, the term ‘child care’ encompasses a broader set of skills and facilities.
Business loan preparation checklist
Before you apply, consider the financial health of the business. The aim is to separate any emotional motivations you may have from objective financial and business considerations. After all, if a lender is likely to think that the purchase is an unwise one, there’s a good possibility the lender’s right.
- National and state licensing. Child care is a heavily regulated industry, and for good reason — parents don’t want to send their children to places that put them at risk. Obtaining the right licensing for your child care center is critical when starting your business.
- Educational program. Are you planning on providing education services to the children you’re caring for? If so, you’ll need to invest in an education program that caters to a specific age group.
- Insurance. All businesses require insurance. You’ll need liability, business, worker’s compensation and property at the minimum. Your state licensing requirements may require you to have more.
- Startup costs. You should have enough money set aside to cover the first three months of your business expenses. This includes paying your staff, buying supplies, marketing materials, licensing fees, rent and insurance. Having this money set aside helps you avoid going broke before your business can get up off the ground.
- Child care facility. Invest in a space large enough to fit the number of children you want to take on. Whether you’re starting fresh or buying a business that’s already running, you’ll want to make sure you have enough room to grow as you add more clients to your roster.
- Employee wages. While you should be compensating your employees appropriately for their labor, it’s important to not dedicate too much of your income to salaries. Try to keep your employee wages around 60% of your total income.
- Qualifications and experience. A child care center operator should have at least three years’ experience running child care facilities. They should also be appropriately licensed and have gone through a background check.
- Location. The child care center should be located in a family-friendly area, but not too close to a competitor.
- Solid financial history. If you’re buying a business that’s already running, make sure you have access to at least two years of complete business financials, including profit and loss statements. This allows you to objectively consider the profitability of the child care center.
What should I consider before purchasing an existing child care center?
- Reason for sale. Some owners initiate a sale because their business is failing financially. Have an accountant or similar professional look over the current owner’s financial statements carefully before plunging into a sales agreement. Be wary of sellers who won’t divulge the financials or who give excuses about why the financial statements are so poor.
- Staff turnover. Frequent staff turnover can indicate an unpleasant working environment. When you decide on purchasing a child care center, be sure to examine the management currently in place and how the employees are compensated for their work.
- Staff experience and training. Child care center staff should, at a minimum, be certified caretakers. If you want to run an educational program, the employees should be trained in teaching preschool-aged children.
- Safety. Safety is a paramount concern in child care centers, perhaps more so than any other business. Consider national safety standards for fencing, door locks, window locks and fire evacuation processes. If the center you’re thinking of purchasing isn’t up to date, it may be a good way to negotiate a lower price.
Common business expenses of running a child care center
Buying your business is only the first step to success. Once you take over, you’re responsible for all the administrative tasks, financial obligations and purchase of supplies.
- Marketing expenses. You’ll need to pay to get the word out. Budget for a website, business cards, flyers and other marketing materials.
- Staff salaries. Your employees will need to be paid before you can make a profit. To attract well-qualified individuals, make your employment package as competitive as possible. Consider lowering your initial take home pay to fund health insurance or additional training.
- Rent. Unless you purchase your building outright, you’ll need to pay rent on your space.
- Insurance. Monthly insurance costs, as well as possible legal fees, should be a good portion of your budget.
- Office supplies. Printers, computers and accounting software are just some of the necessary components of running a child care center.
- Activity supplies. Beyond educational programs, you’ll also want supplies for activities. You’ll need plenty of crayons, paper and toys to keep the children amused.
Purchasing an existing child care center may be complex with licensing and safety concerns, but it can result in a stable business model that could earn you steady profits over time. If you care about children and want to see preschool-aged kids succeed, running a child care center may be the right business opportunity for you.
Interested in learn more about the different financing options available? Browse through our business loans guide for more info.