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Starting a Childcare Business with a 504 Loan

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Starting a childcare business, like a daycare or preschool, is not only a fulfilling endeavor but also a vital service to the community. However, like any business, it can require a significant financial investment to get off the ground. In this post, we will discuss how an SBA 504 loan can be used to help you start a new childcare business and/or expand an existing one.  

What is an SBA 504 Loan?

First, let’s review the basics of an SBA 504 loan. The SBA 504 loan program is a federal financing option specifically designed to assist small businesses in acquiring fixed assets, such as real estate, buildings, and equipment. This program is made possible through partnerships between the Small Business Administration, Certified Development Companies (CDCs), and private-sector lenders.

Here’s how the SBA 504 loan program works in a nutshell:

  1. Borrower’s Equity: As the business owner, you’ll need to provide at least 10% of the total project cost as equity. This is usually in the form of a down payment. 
  1. CDC Loan: A Certified Development Company (CDC) will provide up to 40% of the project cost through an SBA 504 loan.
  1. Private Lender: A traditional lender, such as a bank or credit union, will finance the remaining 50% of the project.
  1. Loan Terms: SBA 504 loans typically have a long repayment term, often 10, 20, or 25 years, making it an attractive option for financing large projects.

Using an SBA 504 Loan for Your Daycare or Preschool

Childcare is a rapidly growing industry in the US: it was valued at 60.4 billion dollars in 2022 and its annual compounded growth rate is projected at over 4% through 2030. There are various reasons for this trend, from parents returning to office work spaces post-pandemic to a rising number of single parents. 

Another reason childcare is expanding is access to government funding, including the SBA 504 loan. These loans were designed to give small business owners breathing room when it comes to fixed assets, which would otherwise be cost prohibitive. Federal funding can refresh a rundown facility, build one from the ground up, or allow you to purchase state-of-the-art equipment to set yourself apart from the competition. Let’s take a look at some specific ways you can use the SBA 504 loan for your preschool or daycare. 

Property Acquisition

The term “fixed assets” encompasses a wide array of projects, including real estate.The SBA 504 loan can be instrumental in purchasing or renovating a property for your daycare or preschool. This could include acquiring a suitable building, playground equipment, and interior renovations to meet state and local licensing requirements.

Equipment and Furnishings

The loan can also be used to acquire necessary equipment and furnishings for your facility, including cribs, toys, educational materials, and office supplies. 

Technological Updates

Technology is no longer optional in many educational environments. The 504 loan can help you remain current with the latest school-related technology so you can offer the highest quality care and education programs to your children. It can also be used to fund and upgrade utilities so your facility remains comfortable.

Expansion and Growth

As your daycare or preschool grows, you might consider expanding your services, offering new programs, or even opening additional locations. The flexibility of an SBA 504 loan can support these expansion endeavors. You are not limited to the number of 504 loans you can take out, so long as you meet the application requirements. 

Benefits of Using an SBA 504 Loan for a Childcare Facility

Childcare is not only a potentially lucrative endeavor, it is an invaluable community service. This is precisely the type of business that the SBA loan programs are meant to support. There are several advantages to the 504 loan, in particular:

Favorable Terms: SBA 504 loans often have lower interest rates and longer repayment terms, reducing the financial strain on your business. You may have up to 25 years to repay your loan, compared to 5-10 years in the case of some traditional loans.

No Personal Collateral: With traditional loans, you are often required to use personal assets (like your house) as collateral. This is not the case with an SBA 504 loan, where the collateral is whatever you use the loan money for. For example, any equipment you purchase with your loan will also serve as collateral should you default on the loan. 

Lower Equity Requirement: You only need to provide 10% of the project cost as equity, making it more accessible for small business owners. A traditional loan might require as much as 20 percent down. 

SBA 504 Loans in Colorado

Childcare is just one of the many businesses growing rapidly thanks, in part, to 504 loans. There are many, many types of small businesses that can benefit from federal funding. In Colorado, your resource for the SBA 504 loan is CEDCO. We are a certified development company that has helped facilitate hundreds of SBA loans for local businesses in the last thirty years. We are passionate about helping our communities grow using this great resource. Call our office today to schedule a free consultation and learn more about how we can help you. 

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CEDCO Small Business Finance
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