Childcare Centre Business Loans
Caring for the next generation: Everything you need to know about buying a childcare centre
Gone are the days when the average Australian family could survive on a single income – today, most Aussie families have both parents involved in some kind of paid employment. This leaves the parents, other family members and childcare centres sharing the care of children. As a result, childcare centres are in hot demand.
Childcare centres provide care for children for whole days, before and after school, and during school holidays. Childcare centres do not provide overnight care.
Lenders tend to look favourably on borrowers looking to finance childcare centres. Increasing demand and available government subsidies make childcare centres low-risk investments for lenders.
Read on to find out how you could raise funds to purchase your own childcare centre.
What factors should you consider when buying a childcare centre?
As with the purchase of any other business, buying a childcare centre is not a decision to take lightly. Start by looking at the factors lenders will consider when reviewing an application to purchase a childcare centre. 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 is a good possibility that they're right.
- Places and occupancy levels. Look for a childcare centre with at least 25 childcare places and with occupancy levels of at least 80%. Occupancy levels of less than 80% put you in a good position to negotiate the price.
- Wages. The total cost of wages and salaries should be less than 60% of the centre's total income.
- Government benefits. The childcare centre should be long day care approved and receive of the commonwealth government's Child Care Benefit.
- Council approval. For the centre to meet national requirements, the property should be council approved. This includes both building application and development application approval.
- Converted residential versus purpose-built. A converted residential childcare centre will give you greater borrowing power at a lower interest rate. This is because a converted residential property has the flexibility to revert to residential status in the future.
- Qualifications and experience. The proposed childcare centre operator – whether this is yourself or someone else – should have at least three years' experience running childcare facilities.
- Location. The childcare centre should be located in a family friendly area, but not too close to a competitor. Consider any current plans for new developments, roadworks or other public works that may impact the childcare centre.
- Solid financial history. Ensure that you have access to at least two years of complete business financials, including profit and loss statements. This will allow you to objectively consider the profitability of the childcare centre.
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What to know about loans for childcare centres
How are childcare centres valued?
Childcare centres are typically valued in one of two ways. These two methods can be used in conjunction to give the lender a good indication as to the real value of the childcare centre.
- Cap rate. The capitalisation rate (cap rate) is the generally accepted way of valuing the majority of commercial properties. 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 childcare centres in the vicinity.
- Rate per childcare place. The second method of valuation is unique to the childcare industry. Lenders will look at the number of full-day childcare position licences the childcare centre holds and will not consider additional places for outside school hours care (OSHC). By dividing the cap rate by the number of licensed childcare places, the lender can put a value on each licensed full-day childcare position.
How much can I borrow to purchase a childcare centre?
The maximum borrowing amount and loan term will depend on whether the childcare centre is purpose-built or is a converted residential property.
- Purpose-built. Lenders will typically lend up to 70% of the value of the childcare centre, with a maximum 10-year loan term.
- Converted residential. Lenders could offer a loan of up to 80% of the childcare centre's value, with a loan term of up to 15 years.
How can I finance the purchase of a childcare centre?
- Bank loan. If you have a strong history with a particular bank, it can be worth approaching them directly for a business loan. Banks look for strong business financials and a solid business plan. The best business plans include revenue forecasts and projected net cash flows. Banks will usually require collateral equivalent to the value of the loan. Banks will also organise a professional valuation of the childcare centre at your expense.
- Mortgage brokers. If you have unusual circumstances that may make it difficult for you to satisfy a bank's stringent lending criteria, a mortgage broker can take care of the groundwork for you. Mortgage brokers have relationships with loan officers from a range of banks and other lenders and can present your circumstances in a favourable way. If there are several lenders willing to offer finance, a mortgage broker will advise you on the benefits of each loan option, including the interest rate and loan term, ability to make additional repayments, redraw facilities, fixed versus variable loans, and early repayment options.
- Negotiate a "buy now, pay later" option. Rather than financing a childcare centre upfront, you could negotiate with the seller to pay them back over a set period of time. Keep in mind that the majority of sellers would prefer a lump sum payment at the time of sale.
- Equity funding. If you have savings, a self-managed superannuation fund (SMSF) or liquidatable assets, consider financing your new childcare centre adventure yourself. While the lack of interest payments offers obvious cost savings, it will pose a considerable drain on your finances, and will not be an option available to everyone.
What do I need to consider before applying?
- Reason for sale. There are many reasons why a business could be for sale, but one reason could be that the business is failing financially. Luckily this is a factor that is relatively easy to verify by way of audited financial statements for at least the past two years. Be wary of sellers who are unwilling to provide full financials or who give excuses about why the financials are so poor.
- Staff turnover. The success of a childcare centre depends not only on the quality of the staff, but on the length of their employment. Many children form a bond with their childcare providers, and continuity of care can directly relate to the business's success. A childcare centre relies on happy children, and children will be happiest when cared for by familiar faces. Frequent staff turnover can also indicate a potentially unpleasant working environment.
- Staff experience and training. It is a legal requirement in Australia that all childcare staff hold at least a Certificate III in Children's Services. Each childcare centre must also have at least one fully qualified teacher on staff. All staff must hold a current Working with Children Check (WWC Check).
- Safety. Safety is a paramount concern in childcare centres, perhaps more so than any other business. Consider national safety standards for fencing, door locks, window locks, and fire and evacuation processes.
Frequently asked questions
Are childcare centres high-profit businesses?
Demand for childcare places continues to rise. Many childcare centres charge exorbitant fees and have long waiting lists for places. Despite this, childcare centres are not considered high-profit businesses. On average, the net profit before tax (NPBT) of a childcare centre will be less than $100,000 per annum.
Can I purchase multiple childcare centres?
Yes, and this is how many investors are able to turn a relatively low-profit business into a highly profitable venture. Running a group of three or more well-performing childcare centres can be a profitable business venture. This assumes you have the financial ability and necessary business management experience.
How can I set myself apart from the competition?
Childcare centres are considered by many parents to be an extension of the child's family. Set yourself apart from the competition by showing that your centre values being a part of the community rather than being a faceless corporation. Run playgroups for parents and babies, and the parents could enrol the children in your childcare centre when they return to work. Consider offering special-interest after-school programs, such as music, art and craft, or languages.
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