Financing Your Child Care

Many excellent ideas that could develop into profitable business ventures never get underway or fail because of inadequate funding to start the business. Getting funding for your business can pose a problem, especially if you don't know where to go or whom to see. There are many sources for financing your center. However, that financing depends on whether you are beginning a nonprofit or for-profit organization.

While public funding is seldom available for start-up, there are several different sources of loans and grants for which you can apply. These sources of financing can be divided into six categories: private sources, venture capitalists, commercial banks, government agencies, grant programs and other sources.

Of these sources, venture capitalists are the most unlikely to finance your center; they tend to invest in growth firms rather than start-up businesses because of the significant long-term capital appreciation and the high yields generated on investment returns.

Private Sources

Private sources include your own savings or funds from friends or relatives, and are among the most common methods of financing.

The advantages of using your own money are (1) there are no finance charges and (2) your search for additional funds is minimized. The disadvantages are (1) you lose the interest you could be earning on your money and (2) you lose the use of your savings as a cushion for any future emergencies.

The advantages of borrowing from friends and relatives are (1) they are less likely to make demands on your style of management, (2) there is no legal limit on how much you can borrow and (3) the terms of borrowing can be negotiated and usually are more flexible than those of commercial sources. The disadvantage centers on the problems that may arise if the money isn't paid back on time.

Commercial Banks

All banks have a commercial division. Since the banking industry was deregulated, many savings and loan associations also engage in commercial banking. All commercial banks offer business loans
-- both short-term and long-term -- at prevailing interest rates.

When applying for money from a bank or individual investor, show a willingness to invest your own money. You must be willing to risk your assets if you expect others to risk theirs. Banks will require collateral to secure their loan against total loss in the event of default. In other words, to obtain funding, the amount of cash or other assets that you will need will depend on the potential success and the level of risk of your business as evaluated by the lender.

If you need a listing of commercial banks in your area, consult the Yellow Pages or request a referral from a trade association, management consultant, attorney, accountant, friend or relative.

Government Agencies

Federal, state and local government agencies offer special financial assistance to small businesses. Many loan programs, administered under government guidelines and funded by the government, are available. Each program is designed to assist a special type of business.

States provide financing through a variety of instruments, often with restrictions imposed. Many instruments are similar to those used by private sector sources, but they may incorporate public policy objectives, such as job creation or tax revenue enhancement. Such instruments are usually designed to ensure that state funds are protected and that the proceeds are used for productive, targeted purposes.

Loans can be extended directly by a state, through a state-chartered corporation, or indirectly, through guaranteed loans from commercial lenders. Typically, loans are used for long-term capital needs, such as plant and equipment. Most states require collateral, so that in the event of loan default the state doesn't lose its entire investment. Interest rates may be at the market rate or may be subsidized by the state. Most loans require the borrower to satisfy certain criteria before a loan is granted, such as showing qualified management, market potential for the firm's product(s), sufficient collateral to secure the loan and adequate cash flow from operations to service debt.

For an up-to-date list of loan programs and their requirements, contact your local Small Business Administration (SBA) office (for information on federal loan programs) or your state economic development office (for information on state loans and grant programs).

Grant Programs

Grants are sums of money provided to businesses without a repayment obligation. They can be funded by federal or state government agencies or by private foundations. Grants are generally reserved for research and development and nonprofit organizations; few for-profit businesses qualify for grant programs.

You will have to submit a written proposal to the agency, organization or foundation where you are applying for a grant. It is a good idea when applying for a grant from private funding sources to:

• Call or visit their offices
• Ask if they have special forms or guidelines for submitting a proposal
• Ask if there are any special requirements for applying, to be sure that you are eligible
• Find out what their funding cycle is (some only give money at certain times of the year)
• Find out when applications are accepted and decisions made

Your proposal should describe:

• Purpose (why you want to start a child care center)
• Goals (what kind of child center you are proposing)
• Procedure (how you will start your child care business)
• Budget (how much it will cost to start and operate your child care center)
• Evaluation (how you will determine if your child care business is meeting your purpose and objectives)

Once you have completed the proposal, review it to make sure you have met the requirements, then submit it to the appropriate office or officer. If your proposal is rejected, find out why. Ask if there are changes that can be made in order for you to resubmit the proposal. Sometimes sources are willing to fund only a portion of your original request. Find out which parts they can fund and resubmit for those parts.

Other Sources

Credit unions and life insurance companies also can be a source of funds. Credit unions offer personal loans to members, usually at interest rates lower than those of commercial banks. Insurance companies will often loan money against a life insurance policy for up to 95 percent of the policy value. Their interest rates also are generally lower than those charged by commercial banks. Interest payments may be deferred as long as your premium payments are made. But until the loan is repaid, your coverage will be reduced by the amount of the loan.

Whatever financial institution you approach, show a willingness to risk your own money and have a business plan or proposal that is well written, factual and well organized.