Expert Advice: Exploring Finance Options to Open or Grow Your Childcare Franchise

The child services industry plays a vital role in the lives of many Australians, with businesses including daycares and childcare centers providing vital care for children across the country.

“After more than 12 months of tightened lending conditions, prospective business owners may have to expand their horizons in their search of suitable finance options.”

Kaitlyn Meehan | FRANCHISE FINANCE AUSTRALIA

The government also recognises this and has been injecting funds into the sector since the 1970s. However, the decision to open a childcare services franchise still comes with notable set-up costs and additional expenses down the road for refurbishment and expansion. So, where do prospective franchisees get the funds required to get their business up and running?

There are a broad range of funding options available to prospective and existing franchisees to either help with the initial establishment of their business or expand on their existing childcare business. The best option will vary depending on the individual’s situation including their own financial circumstances, how long the business has been operating, and what they are looking to fund.

There are a range of different services in the childcare sector including long day care (LDC), occasional care (OCC), pre-schools/ kindergartens and outside school hours care (OSHC). Demand for these different types of care can depend on the centres geographic location as well as what is available from competitors in the area. The type of facility a franchisee chooses to open will impact what equipment and fitout is required and can influence their choice of funding for the business.

Current Lending Landscape

After more than 12 months of tightened lending conditions, prospective business owners may have to expand their horizons in their search of suitable finance options. Whilst there is still a wealth of funding options on the market, applicants may face stricter application requirements when going down traditional paths.

Traditional finance providers such as banks offer a range of products that fund both soft costs and tangible assets which are suitable for both first time and existing franchisees. These lenders are often competitive on rates but tend to operate in a more risk-adverse manner. Because of this, their application and collateral requirements are rigid and can act as a barrier to some applicants. Requirements for property-based security is a significant obstacle, with 91 percent of small business owners stating they would rather take a higher rate than risk their home as collateral.

For those who want to explore the options beyond traditional providers, there are also non-bank lenders in the market which offer more flexible funding solutions that can be a better fit for unique circumstances. Whilst these lenders can come at a higher interest rate, they also have much higher approval rates and a larger appetite for funding. This means they are often more willing to work with applicants to find a solution to fit their diverse needs.

Alternative lenders also offer a range of products including traditional business finance which can encompass soft costs such as franchise fees and legal costs, asset finance which will only fund tangible equipment and fitout, and even rental solutions. The latter two options often take the assets that are being financed as security, meaning there is no requirement for additional collateral, a benefit for many small business owners.

The Application Process

Regardless of what lender you go with, there are some steps that you can take to ensure you put your best foot forward when submitting your application. Whether applying with a traditional or alternative financier there are some common elements that they will be assessing in your application. These can be summarised by the 5 C’s of credit: Character, Capacity, Capital, Collateral and Conditions.

Character refers to the applicant and assesses elements such as their willingness to repay the debt, credit reports, reputation, and any information found across social media and search engines.

Capacity looks only at the applicant’s ability to repay the borrowed funds, and considers income, expenses and any existing financial commitments.

Capital is an assessment of the applicants overall financial positioning, and the liquidity of any available assets.

Collateral examines the assets available to be used as security for the loan. For traditional lenders this may be home or property, and for non-bank lenders this is often the assets being financed themselves. This can also include Directors and Personal guarantees.

Conditions is the terms of the funding being offered to the applicant, such as interest rate, term and any additional fees.

Taking these principles into consideration, what can you do to prepare the best possible application for your childcare franchise? Well, it all comes down to preparation, having all the essential documents compiled for the initial application encourages a more streamlined approval process, and reduces the need for any back-and-forth. Essential documents will vary based on each lender, but there are some staples: the application form, a valid form of ID, Asset and Liability statements, commitment schedules, financial projections and a business plan. We suggest having up-to-date copies of these documents ready to accompany any finance application.

“Being educated about your finance options and knowing how to prepare an appealing application is the first step in securing funds to open or grow your childcare franchise.”

Wrap-up

As many family units rely on multiple income streams, demand for childcare services is on the rise. There is significant potential for prospective and existing franchisees to take advantage of this steady rise in demand, however access to finance can be a hurdle to overcome in the franchising journey. However, it is clear that the lending landscape is opening up for potential franchisees and funding options are become more flexible to the needs of applicants. Being educated about your finance options and knowing how to prepare an appealing application is the first step in securing funds to open or grow your childcare franchise.

Kaitlyn is a marketing and communications professional who has been working within the franchise finance industry for almost three years. Building relationships with franchise networks across Australia, Kaitlyn has gained unique insights into the funding needs and challenges faced by the sector.

Franchise Finance Australia is a specialist funder to Australia’s franchise sector. We have unrivalled knowledge of franchisees funding requirements as well as direct relationships with the franchise networks operating in Australia.

www.franchisefinanceaustralia.com.au/