Daycare Center Loans – Current Conditions

With major national daycare center lenders like UPS and CIT now out until further notice, many childcare centers owners and prospective owners are searching for financing options - and are finding few reliable programs. 

One of the biggest issues here for both independent and franchised daycare centers is that most banks will no longer consider Tenant Improvement Loans.  I.e. loans to build out leased space.  Instead, most banks (that are still funding loans) want the collateral of the commercial real estate.  

This can create a couple of different issues for the owner or franchisor.  Number one, it can run right against the business model of the franchise.  For example, the franchise might have a smaller location requirement and the process of finding land, going through the zoning/permitting, constructing the facility, etc don’t make sense, based on their smaller location model. 

The other issue for the individual owner is that the capital injection will normally be greater, not on a percentage basis, but rather on a dollar amount.  For example, on a leased facility, the operator would be expected to come in with 10% -15% cash of the tenant improvements/equipment costs.  So, if these costs were $700,000, most franchisee have been expected to come in with $70,000 -$105,000 “out of pocket”.   

If on that same deal, the operator decided (by choice or forced into due to the credit crisis) to own the facility, they would need roughly $250,000 to $375,000 i.e. 10% -15% of the total project cost (In this example, say $2,500,000).  This difference in dollar amount is obviously substantial and will eliminate the opportunity for many hopeful daycare center owners. 

For operators that can come up with the required cash, owning the facility is often their best route, regardless of the credit crisis.   For one, their monthly payment is typically lower than if they leased.  This increase in cash flow is paramount for any business whether daycare or not.  Also, additional benefits such as depreciation and real estate appreciation are two classic advantages of owning.  And of course, every month the borrower chips away at the loan balance building long term wealth rather than simply paying rent. 

All in all, there are still options out there for daycare centers loans.  However many industry players will have to be open minded and flexible with adapting to the current standards if they want to get there daycare centers funded.