SBA Loans for Daycare Centers
SBA loans for daycare centers and preschools can be financed via two SBA programs: the SBA 504 and the SBA 7a.
The SBA 504 is a very useful program for real estate transactions and can accomodate very large loan requests. (See info re: the 504 further down the page or visit our 504 loan page).
The SBA 7a, however, is a particularly remarkable and flexible type of financing that can not only be used for real estate, but all of the following:
- ground-up construction
- business or building expansion
- purchase of an existing building
- purchase of an existing business
- refinance and/or recapitalization of a business.
All of the following types of businesses and real estate are eligible:
- Daycare centers
- Childcare centers
- Private schools*
- Montessori schools
SBA Loan For Preschools & Daycare Centers - Benefits
What makes the SBA 7a loan for daycare centers, preschools and childcare centers so remarkable is that is can be used to finance almost anything your business needs (within reason) and you can get very high leverage from certain lenders.
Some lenders routinely offer 100% financing or over 100% financing for not only the purchase of a building or ground up construction of a new building, but if you already own a successful preschool or daycare center, you can purchase another business or possibly expand into additional (new) locations and also get 100% financing.
SBA Loan Interest Rates for Preschool and Daycare Financing
If you are buying a business, you will typically be limited to 10 year term. Many lenders will only fix the rate for 3 or 5 years, although some will fix the rate for the full 10 years and still others will only offer a floating rate. Floating rates are typically offered by lenders who are willing to approve the loans that the more conservative lenders will not.
25 Year Loans for Real Estate
If your loan request is mostly being used to finance real estate, some lenders will also offer fully fixed 25 year 7a loans.
Most lenders prefer to offer floating rate loans that adjust with the Prime Rate, because those are more profitable for the bank or lender, but for stronger transactions there are lenders who will fix the rate for 3, 5, 7, 10 or even 25 years. Most of these lenders will require the usual/traditional 10% down, but there a few who will offer both 100% financing and a rate that is typically fixed for up to 5 years with the standard 25 year amortization. With some lenders, the rate would change once every 5 years after the initial fixed period and with others, it will become a floating rate after the 5th year.
100% Financing to Acquire or Start Another Preschool or Childcare
Most lenders will tell you that the rule is that you need 10% down to be approved for an SBA loan for a daycare center or a preschool when you are buying someone else's exising business, and that is true, but the exception is when you already have a proven track record of success with a particular business and you are looking to grow it by acquiring another or adding locations. And in this case, there are lenders who will lend you 100% of the purchase price of the business and give you additional working capital to assist with the transition.
The key to being eligible for a 100% loan for a daycare or preschool is you must have owned your existing business for long enough to prove to a lender that is makes sense to build, buy or expand. i.e. you must have a solid track record of profitable ownership, but if you do then 100% financing is very possible
Please contact us about qualifications for this as many lenders do not realize this is possible.
100% Ground Up Construction
In the case of 100% ground up construction financing for an SBA loan for a preschool or daycare center, some lenders will finance everything needed to acquire the land, pay for construction and finance the closing costs. In addition, the better lenders will add into the loan enough "reserves" to cover all payments not only during construction, but also during the first year (or possibly more) to make sure you have enough money to reach profitability with the least amount of stress. They will also finance moving costs and even refinance other business debts as part the transaction if necessary - and all over the full 25 years as long as at least 51% of the loan proceeds are used to finance the real estate.
Keep in mind, that it is sometimes hard to make it clear under what circumstances 100% financing is possible without making it sound to easy or too good to be true and the lenders that offer this type of financing will only offer it for deals that are "strong enough" and strong enough means different things to different lenders depending on what kind of lender they are (conservative bank, portfolio lender, secondary market lender, etc.), but all 100% lenders will, at a minimum, require some level of borrower strength in all of the following categories:
- Good personal credit for all guarantors/owners
- Good STABLE cash flow for your existing location - typically based on the most recent business tax return AND year to date financials.
- Solid financials/cash flow on the sellers tax returns
- Robust business plan, projections and make-sense projections for the new location - whether it be ground up or an acquisition
- The right, experienced management team
Again, those are the basics/minimum requirements, but even those require some "drilling down" on each, so taking them one by one.
Good Personal Credit
The definition of "good" personal credit to an SBA lender should really be defined as "good enough" for the type of requested loan and it can really differ from lender to lender.
Good enough depends on the level of risk. If you are applying for a loan to purchase a building that will replace one you are renting and the new mortgage payment is not much different than the rent you currently pay, AND you have solid cash flow and enough other good traits that SBA lenders for preschools and daycares like to see, but your credit is average or below average then you can probably get it done.
If, however, you have average or below average credit and lower credit scores, but decent cash flow and you are looking to build a new location from the ground up that will be an expansion of your existing business and not a "rent replacement" transaction, then that is a much riskier transaction for a lender and it might be tougher to get an approval, since the new loan will be based on projections and not existing cash flow and you may be declined or you may have to settle for a less attractive interest rate that will likely be floating.
The question then becomes, is it worth it. In other words, it you settle for less than attractive terms due to some weakness in your loan file, do you still go through with it or are the terms such that it does not make good sense to proceed with the loan.
Ultimately, it is up to each borrower, but there is a feature of the 7a that can be helpful in your decision and that is the fact that 7a loans can be refinanced after just 2 years with a 1% prepayment penalty and after 3 years with no penalty and the reasonableness of this prepayment penalty, gives you an exit strategy for getting into a better loan should interest rates be more attractive in 2 or 3 years or more.
You can visit the following blog post for more information re: SBA credit requirements including if it is possible to get an SBA loan with a past bankruptcy here.
Skin in the Game
Some lenders are willing to offer 100% financing, but it does not mean they will do if you have little cash, have too much business or personal debt already and/or if you are putting your last dollar into the transaction or all of your money is not really your money.
The SBA allows borrowed money, gifts, investors, retirement account rollovers and seller held funds on full standby for part of the downpayment, but if the lender does not feel like you have enough of your own skin in the game, then you have no shot. There seems to be a misconception with some borrowers that the SBA is some kind of grant-type program and it is NOT. Most SBA loans are made by banks and banks are risk-averse, so just because they are getting what amounts to an insurance policy from the SBA on 75% of what they are lending out, does not mean they are not going to carefully underwrite every loan. As a bank they will always see risk where you do not. It is what they do.
Also, every transaction is "case by case" and every lender decision is their decision and typically has nothing to do with the SBA, because most of the better lenders are authorized to underwrite the loans themselves. Meaning, these loans are not underwritten by the SBA.
Most of these loans are underwritten "in-house" by the bank or lender's underwriter and according to that lender's underwriting criteria, so while you may read something online from a seemingly authoritative website or talk with your local bank about what can and cannot be approved or what the guidelines actually are, you might not be getting the whole story. You should not assume that whatever a lender, broker or other sources tells you or publishes online will be 100% accurate as each lender looks at each transaction slightly different from the next based on their credit and underwriting guidelines, their experience with lending to your type of business and their risk tolerance, etc.
We frequently get calls from borrowers who say their bank or their real estate agent or business broker told them something can't be done or that the SBA rules dictate such and such is "only possible if..." or that you need to put down 10% "no matter what" and they have been "doing this a long time" and that is just how it is...well, that may or may not be how it is.
This is not to say that the more creative lenders will make bad loans. For the most part, they won't, as is evidenced by the very low default rate that most SBA lenders have. The majority of lenders who allow for more flexible financing structures or underwriting guidelines, still have to adhere the SBA rules, but there is a lot of nuance within the rulebook and a lot of room for interpretation. And this is a good thing for borrowers. It is a good thing, because many borrowers need more flexible lenders to work with them for one reason or another.
Why the SBA Guaranty Matters to Lenders
The SBA guaranty makes it easier for lenders to take risks and to approve loans they otherwise would not be able to - like 100%+ financing, loans for businesses that do not have much collateral, loans to borrowers with bad past credit including an old personal BK (again, within reason).
Every transaction is basically the sum of it's parts. Meaning you need to have enough cumulative strengths to get a lender comfortable that they are making a good loan to a borrower who will not default.
The SBA guarantees 75% of the loan amout for the lenders and this is why they can take the risk.
Where We Can and Cannot Help
The SBA is first and foremost a "cash flow loan" and what you need to realize is that just because the SBA says something can be financed, it does not mean an SBA lender will approve it.
For example, we get a lot of calls from potential borrowers who are looking for startup capital, but we really don't have many lenders who are interested in funding startups or small loan requests or for borrowers who either have limited or no experience.
Same goes for borrowers who are looking for a few hundred thousand dollars or less or might be looking for money to grow their business from a smaller home-based operation to renting a space that is a little larger and better for their business. We just don't have lenders that work in that space.
Our SBA lenders are just not interested in those types of transactions and there are better lenders with better solutions for those types of transactions.
Our SBA daycare center and preschool lenders are typically looking for loans for established businesses looking to borrow anywhere from $350,000 to $20,000,000. That is quite a large sweetspot, but it makes sense if you understand that regular SBA loans - like 7a loans between $350K and $5 million - take a lot of effort from the lender to get closed and they would rather work on stronger transactions where they can make more money. It is basically, free market capitalism at work.
If you have a really strong business or a really strong transaction and you need to borrow more than $5 million for a preschool or daycare then there are some SBA 7a lenders who will lend you up to approx. $9 to $10 million by giving you an "unguaranteed" 2nd mortgage that they put behind a 7a first mortgage of $5 million.
There aren't many lenders who will do this, but the ones who do, do it regularly for the right borrowers.
So what is the right borrower? The ideal scenario for this type of transaction would be a business moving from renting to owning where the owners have great credit, the business has great historical cash flow, proper managment, etc.
The rate and terms you get are based on the risks the lender sees in the deal. If you have not been in business for very long or have bad credit in the past or...then your options will not be great, but they might be good enough.
SBA 504 Refinance for Preschool or Daycare
Many businesses already have an SBA 7a loan, but many also have a 7a that has a floating interest rate tied to the Prime Rate. As of late last year (2021), you can now use the SBA 504 program to refinance an SBA 7a loan and the guidelines are much more flexible than they have been in the past. You can get more information on our SBA 504 refinance page.
The 504 program is a 2 - loan structure where the 2nd mortgage is always fixed for 20 or 25 years (for real estate loans) and the first mortgage is usually fixed for at least 5 years, so it can be a very good solution for a Prime-based loan in a rising rate environment.
As stated above, new construction financing is definitely available. Financing for start-ups is also available if you have 10% down and the right qualifications and the right team.
Existing profitable businesses (including independent businesses) as well as franchises in good standing with the SBA are eligible for construction funding.
It is easier to finance a name brand such as:
- Goddard Schools
- Kids R Kids
- Discovery Point
- Creative World
- Childrens Learing Adventure
- Rainbow Academy
- Rainbow Station
- Childrens Lighthouse
- Kiddie Academy
*Private School Financing is available through SBA, but the business must be "for profit" and it cannot have a religious curriculum.
However, religious oriented, Non-Profit, Tax Exempt or "501c3" organizations are eligible for financing with non-SBA sources (including construction and refinancing) and we have a few expert "C3" lenders who specialize in private school financing if that is what you need help with.
Please contact us 1-800-414-5285 for more information re: for profit or non-profit Private Christian School financing or any other non-eligible type of business as we may have the right solution or may be able to tell you where you can find appropriate financing. (Minimum real estate loan for 501 (c) (3) is $1 million).
Benefits for Daycare Centers & Childcare Centers
- SBA 504 & 7a loans are some of the few types of commercial financing available for preschools and daycare or childcare centers with little or no down payment.
- The loans enable you to borrow up to at the very least 85% to 90% of the total project costs and you may qualify for 100% financing.
- If you create a Green School or build some energy efficiency into your facility you can qualify for more money with "Green 504" loan. For instance, if you already own a few day care centers or preschools and you are out of SBA eligibility you can borrow more if you "go green," since the SBA now has an initiative for green building financing.
- SBA loans are long term, fully amortized commercial loans with no balloons.
For more information about the 7a program, click here
For more information about the 504, click here
Green School Information
By becoming an environmentally friendly institution you would also:
- secure excellent long term financing
- cut your energy costs significantly
- realize some excellent tax benefits
- save money that can be reinvested in the school
- create a healthier environment for your students and teachers
- create a built-in "lab" for teaching your students about alternative energy sources...
- and as a "green school" you might also be able to get some good PR out of it.
Click here for a comprehensive information about Green Schools from the US Green Building Council including info about the benefits of green school construction.
Please contact us for more information about SBA financing and how it could be a good fit for your daycare center business, preschool or private school. Call 1-800-414-5285