How to get a business loan for a child care centre

How to get a business loan for a daycare

Learn how to get a business loan for a daycare by exploring the following steps:

1. Create a business plan

Most lenders require a comprehensive business plan when you apply for a loan. Be sure to include the following information:

• Business overview (services offered, target age groups, hours of operation, etc.)
• Financial plan (revenue or revenue projections, expenses, profit margin, funding requirements)
• Marketing strategies
• Local market analysis
• Staff structure (certifications, roles)
• Licensing and certifications required

2. Determine the type of financing you need

Once you complete your business plan, you should know how much funding you need, which makes choosing the type of financing easier. Whether you’re purchasing a new daycare or expanding, you can consider a term loan, secured loan, line of credit or government program.

3. Check your eligibility

Lenders typically evaluate your eligibility for daycare business loans based on these factors:

• Personal and/or business credit history
• Business financials
• Collateral
• Years in business
• Vendor payment history

4. Compare loan programs and lenders

Look into both traditional lenders and alternative financing options and compare their terms and eligibility requirements. Ask yourself the following questions to choose the right lender for you:

• Who is the lender? Do they have a good reputation?
• What interest rates are they charging?
• What additional fees are they charging?
• Can I afford this loan?
• Do the monthly payments fit my budget?

5. Prepare your documents

After choosing a lender and ensuring you are eligible, gather all the necessary documents to apply for your business loan for daycare. This includes:

• Business plan
• Personal and business financial statements
• Proof of collateral
• Licensing and certifications
• Legal documents (business registration, incorporation documents)
• Personal and business tax returns

6. Apply for the loan

With all your documents in hand, you can apply for your chosen loan. If you choose to go with a traditional bank or government program, you may be able to start the application online but typically have to go into a financial institution to complete it. Applying for a loan with an alternative lender can usually be completed entirely online.

7. Review the loan terms

If you’re approved, your lender will send you a business loan agreement. Review the terms and conditions carefully, noting details like the interest rate, repayment schedule, fees and charges, and collateral terms. If everything looks good, sign the agreement and wait for your funding.

How do lenders evaluate daycare businesses?

A lender will likely determine 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 centre’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 centres in the local area.

If you want to start a new daycare, lenders will focus less on historical financials and more on the strength of your business plan and market potential. They’ll assess projected cash flow, enrollment factors and detailed startup costs to determine the business’s ability to generate revenue and repay a loan. They may also look at personal credit scores, available collateral and your experience in the child care industry.

Can I qualify for daycare business loans if I have bad credit?

Yes, you can apply for a daycare business loan with bad credit, but it’ll be more challenging. You may not get approved by a bank, but online lenders may focus more on your business plan, potential and collateral than your credit score. However, you’ll likely only get approved for low amounts with high interest rates.

Types of business loans for daycare centres

Outside financing will likely be necessary, whether you’re starting your child care business from scratch or purchasing an existing business. Here are the top business loans for daycare options to consider:

Government programs

There are plenty of federal, provincial and territorial financing options, including:

• Canada Small Business Financing Program (CSBFP)
• Child Care Capacity Initiative
• EYC Expansion Capital Grant
• EYC Architectural Fee Reimbursement Grant
• Child Care Space Expansion
• Early Learning and Childcare Preschool Designated Spaces Creation
• Early Learning and Child Care Building Fund
• Child Care Renovation Expansion Grant
• Early Childhood Infrastructure Fund
• New Child Care Spaces Fund

Term loan

A term loan can cover just about anything—from purchasing an existing daycare, renovating your home for a home daycare, or buying toys and furniture. These come from a variety of lenders and have a slew of unique features, so compare your options carefully. You can usually borrow amounts up to $1.5 million, which can help cover the costs of renovations, supplies and more.

Seller financing

If you’re purchasing an existing daycare, you could negotiate with the seller to pay them back over a set period of time rather than financing the child care centre upfront. However, many sellers will likely prefer a lump sum payment at the time of sale.

Secured loans

For one-time large purchases of things like new furniture and toys, you may want to consider a secured loan. Since you’ll need to use your equipment as collateral, you can lose it should you default on your repayments.

Business line of credit

A business line of credit is a suitable option for flexible financing, and can be especially useful if you’re looking to cover operating costs for an existing child care centre. 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.

Example: Merve needs to train staff

Merve has owned her childcare centre for five years now and has decided to switch to a more advanced and hands-on educational program. While she’s purchased the program itself, as well as the necessary books and supplies, she still needs to train her four staff members. Training will take place over the course of six months and will be done online three days a week for two hours after work. This means Merve will not only need to pay for the training for each staff member, but she will also need to pay her staff for six more hours of work a week for a total of six months. She has already budgeted wages into her costs, but isn’t able to outright pay for the training course for each staff member—which costs $5,500.00 each.

Merve needs a loan for $22,000.00 to train her four staff members. She heads online to compare small business loans for daycare lenders and is able to get approved for a $22,000.00 loan with a competitive APR and a loan term of 3 years. She knows this business move will pay off and attract more customers, which will help her better manage her costs.

*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the lender, the borrower’s personal financial situation and other factors.

What to consider before purchasing an existing child care centre

• Reason for sale. Some owners initiate a sale because their business is failing financially. Have an accountant or similar professional look over the last two years of 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 centre, be sure to examine the management currently in place and how the employees are compensated for their work.
• Staff experience and training. Child care centre staff should, at a minimum, be certified caretakers. If you want to run an educational program, the employees should be ECEs and trained in teaching preschool-aged children.
• Safety. Safety is a paramount concern in child care centres, perhaps more so than any other business. Consider safety standards for fencing, door locks, window locks and fire evacuation processes. If the centre you’re thinking of purchasing isn’t up to date, it may be a good way to negotiate a lower price.
• Facility condition and location. Examine the physical condition of the property and determine whether you’d need to make any repairs or upgrades, like renovating to increase the capacity. Evaluate the daycare’s location as well to ensure it’s in a family-friendly area but not too close to competition.

Common business expenses of running a child care centre

Here are some of the common daycare expenses you can cover with a business loan:

• 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, but try to cap it at around 60% of your total income.
• Rent. Unless you purchase your building outright, you’ll need to pay rent on your space.
• Office supplies. Printers, computers and accounting software are just some of the necessary components of running a child care centre.
• 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.
• Insurance. Monthly insurance costs, as well as possible legal fees, should be a good portion of your budget.
• Permits and licenses. To run a daycare, you need province-specific or territory-specific licences and permits, such as a child care licence, zoning permit and business licence.
• Health and safety training. You and your employees need up-to-date first aid, CPR and food safety certification.

Bottom line

Purchasing or expanding a child care centre 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 or daycare centre may be the right business opportunity for you.

Interested in learning more about the different financing options available? Browse through our business loans guide for more information.

Frequently asked questions

• How much can I borrow to purchase a child care centre?

  The maximum borrowing amount and loan term will depend on a few factors, including whether the child care centre is purpose-built or was originally built as a residential property, as well as the zoning laws in your city or province, your credit score, business plan, gross annual revenue and more. Business lenders usually offer borrowing amounts starting at $1,000 up to $1.5 million.

• How do I improve my chances of getting approved for a daycare business loan?

  To increase your chances of approval, ensure you have a solid business plan that clearly outlines your financial projections, target market and business strategy. Lenders will also consider your credit history, collateral and any experience you have in the child care industry. Maintaining a good credit score, having well-organized financial statements and offering personal guarantees or assets as collateral can also improve your approval chances.

• What qualifications do I need to open a daycare?

  Each province and territory has its own requirements for opening a daycare in Canada. These may include having a diploma or degree in early childhood education (ECE), a clear criminal record check, health and safety training, and a childcare business licence.

To make sure you get accurate and helpful information, this guide has been edited by Leanne Escobal as part of our fact-checking process.

Written by

Rebecca Low

Writer

Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio