Financing for Child Care Services: Three Reasons to Use the SBA 504 Program

Prior to the pandemic, the child care services industry in the U.S. generated around $54.5 billion in total revenue according to IBISWorld estimates. Current projections from analysts estimate childcare industry revenues have since recovered to the $55-58 billion range, of which Illinois accounts for $3 billion.

As more people return to office settings for work, the demand for child care services continues to grow. The SBA 504 loan presents an attractive, low-cost way for new and existing preschools and daycare centers to acquire fixed assets and position their businesses for growth. Child care service providers can use the SBA 504 loan to purchase, renovate, and expand their facilities.

SBA 504 Program Basics

The SBA 504 loan program is the premier economic development initiative administered by the Small Business Administration (SBA). This public-private partnership provides a long-term fixed rate lending solution for small business owners to buy, expand or refinance major fixed assets – such as land, commercial real estate, and equipment. The 504’s borrower-friendly terms include:

• Low down payment – up to 90% financing for established businesses, freeing up capital reinvest in the business for other expenses;
• Below-market interest rates – lower and more affordable monthly mortgage payments;
• Long-term rates 10 (typical for equipment purchases), 20 or 25 year fixed – no surprise balloon payments.

Build Equity

When an SBA 504 loan is used to finance the purchase of commercial real estate, the business owner builds equity as they pay down the loan. As opposed to paying rent, making monthly mortgage payments helps the business owner acquire full ownership over time. Additionally, owning the real estate provides long-term security and control over overhead, as compared to leasing, even if business fluctuates.

Building equity provides financial stability and gives the business an asset that can be leveraged in the future. This wealth creation is a major advantage of using a 504 loan to buy, rather than lease, a space.

Flexibility to Personalize and Renovate

Building ownership is just the start of the SBA 504 loan. The 504 loan provides the financing to create a welcoming and personalized environment. Child care service owners can use the 504 to optimize the center layout, finance playground equipment, and ensure compliance with state and local regulations. This is critical to creating a safe environment for children to learn and play.

As with all SBA 504 real estate purchases, the business must occupy at least 51% of the building purchased. If the financing is for the construction of a new building, the business must occupy 60% of the building.

Leverage Equity for Cash Out

In addition to building equity, for those small business owners who already own their building, the SBA 504 refinance program may be a great option to save and improve cash flow.

In addition to the lower monthly payments, fixed 20 or 25 year low interest rate, and payment predictability of the 504 loan, refi clients can take cash out for eligible expenses. Eligible expenses for cash out funds include:

• Salaries (non-owners)
• Utilities
• Inventory
• Business line of credit and business credit card debts

Download the program flyer and connect with a member of SomerCor’s loan origination team to learn more about how the SBA 504 loan program is a great fit for the professional services industry.