Starting A Daycare Center — Part 2: Finding Funding And Calculating Expenses

Funding: the cornerstone of daycare center success

Now that I’ve gone over some of the groundwork considerations when starting a daycare in Part 1, it’s time to talk funding. The simple truth is that without an adequate source of money, your daycare dream will remain just a dream. As you scout out a location and get to know licensing standards, keep in mind the necessity of securing daycare center funding (and accounting for expenses). Here’s a guide that will help you nail funding and get to earning.

Learn how to find funding and calculate expenses when starting a daycare center in our video:

How do you get money?

You’ve got great plans but how are you going to get the money to do all this? That’s the big question. Finding viable daycare center funding is absolutely the key to achieving your potential. Obviously, one way is to privately fund your daycare center. If you have the money, that’s great. But if you don’t have the money, it’s time to think about different options for finding daycare center funding. If you have another business that’s successful with income then the bank may give you a loan. However, they will not base any loan they’ll give you on your projection of what the daycare center will make, but only on what your existing business already takes in. Another way is to find investors — be they family, friends or colleagues who are interested in your idea. Going into business with partners can be a win-win, although with family or friends things can become sensitive. If you have no other choice, make sure you have strong paperwork in place so you can refer to it in any situation to avoid personal confrontations down the road if things don’t work out perfectly. Ideally, you want to find passive partners. This means you manage the daycare center but the other partner or partners get a share of profits and contribute financially. Say, for example, the investors give me cash up front and I pay them back in a 50/50 split. If I project my daycare center will make $200,000 a year down the road, the investor will get $100,000 or if there are two they’ll get $50,000 each in return annually for their up front funding. The deal you work with investors may vary regarding paying back the principle.

Small Business Administration (SBA) loans: worth a look

This is an option to look into if you purchase an already open business. Let’s say someone wants to sell you their daycare center for $500,000. You can typically put 20% down ($100,000) and get an SBA loan. This is contingent on proving you have good credit, can pay back the loan and so on. SBA’s goal is to help those without other means to get a loan. It’s not done directly through the government, but instead through local banks. Basically, there is very little exposure for the banks. From my understanding, with SBA loans, if you don’t pay back the loan, the banks will typically only be on the hook for a small percentage, with the government required to absorb the rest of the default. If you do have a financial plan to show how you’ll make money, decent credit and enough for the 20% downpayment, you can purchase a business through an SBA loan. It won’t be based on any other business you own, but instead on your ability to prove your daycare business plan is sound and you have a good credit history. I don’t have personal experience with these but I believe it’s called the SBA 7a Loan.

Try to negotiate free months with your landlord

There are many ways to do this. One negotiation tactic is just to explain that it takes a long time to open a daycare center so you need several months free. In discussing the lease you want to try to get as many months free as you can. Plans, permits, daycare licensing, build-outs might take six months to a year. Landlords want a tenant and a commitment. If you negotiate the free months, it is possible that they will want a bigger security deposit in return. However, negotiating free months shows you as competent and professional, which is nice to see in a prospective tenant.

Try to get your landlord to invest on your behalf by financing build-outs, fire alarms, and room modifications as needed. You may agree, for example, to a five-year lease in return for up to $100,000 in build-outs paid for by the landlord. Another option is to ask for help in the build-out and tack it on to the lease. Say you want $120,000 of build-out and so if the landlord provides that you’ll tack on $2,000 extra per month over 60 months (a five-year lease). The goal here is to avoid up-front demand for your cash. Other People’s Money (OPM) or at least reducing your up front costs is a business basic.

Be ready for income loss at first

It’s a lot of stuff, so get it down on paper. The most important questions are: how much income am I projecting? How much is rent, labor, food, supplies? How much do I project losing each month (pre-opening and post-opening)? I’ve created a sophisticated Excel sheet that lets me calculate all the ins-and-outs of my daycare center income and expenses. Say you calculate $200,000 costs for the lease and build-out, then $20,000 a month in losses the first month, then $10,000 and so on, then gradually starting to make money. This will help you know what to expect. Don’t get discouraged, just dig right in and see if your plan needs any changing based on projections. Also, don’t forget to itemize how you are going to pay back your initial startup costs once you start making money.

As a rule of thumb, add 20% to your expense estimates. There are always unexpected costs that occur, believe me!

What to put on your construction expense list

Upfront costs can include everything from cubbies to cribs and toys. List everything. Construction is another huge cost — factor in the cost of demolition, framing, rough plumbing, rough electrical, HVAC systems, baseboards, interior doors (check for possible fire rating requirements on doors), programmable buzzer system for security (discussed in Part 4: All About Construction), drywall, duct-work, counter and shelving installation, architectural work, permits, everything. How do you come up with these numbers? Get an estimate or two and then you know what you’re dealing with. Estimate architectural fees (I calculate mine as about 6% of total build-out). Security deposit cost, non-opening losses per month — when it’s sitting empty under construction you still have to pay electric, gas and heating costs too! Make sure every last detail is tallied. It may be tiresome at first, but it will help you in the long run.

Free daycare income and expense planning tool!

Here’s a free financial budget and startup expense Google sheet for your daycare to help you plan for income and expenses. TO EDIT: You must select File > Make a copy so you can customize this for your daycare center.

A few more general expenses you might not have thought of

General expenses add up to such as: Cleaning supplies, printers, computers, murals, legal paperwork (forming a partnership? you’ll need a lawyer to draw it up), garbage bins, phones, furniture, iPod touch for doing daily reports on apps like Brightwheel, wash cloths, wall clocks. Expenses can rack up! You want to minimize them, of course, but you also want to make sure you can pay what you need to run a daycare.

Financial projections are all about planning for the future

Financial projections are your road map to success. You should come up with a projected growth rate of how much your enrollment will go up monthly, along with income. This will mean you need more staff, too, to meet growing student enrollment and meet student-to-teacher-ratio requirements. Factor in income such as tuition, registration fees, wait-list fees. And calculate salaries, rent, software, supplies, utilities, advertising and marketing budget (everything from buying ads at a local grocery store to hiring a professional photographer for promotional photos), bank service charges, credit card processing fees, food supplies, insurance, accounting fees, outside services like a nurse consultant for monthly required medical record checkups, and so on. The roster of expenses a typical daycare stacks up are going to way (way) more than offset your starting income. The truth is you’re going to lose money at first before you start making it but that’s completely normal. Remember that the cost of things like food and supplies will increase as enrollment (and income) increases. Factor this into your projections. If planned out correctly, the months of losing money that you planned for will be left behind as tuition income grows and profit starts accruing.

Washer, dryer, heating, construction, plumbing: it can all break. Always remember to factor in repair costs to your expenses and financial projections.

Opening takes time, and you should factor that into your calculations

Most people think you can get everything done in a couple weeks once you’ve signed a lease. Unfortunately, that’s not the case. It doesn’t have to be all negative, though. You can use that time to improve your plans, rework your calculations and look into new options for earning extra revenue.

Learning how to work in Excel or Google Sheets helps, too.

Now, let’s continue on to How to open a daycare part 3: Learning Your Way Around Red Tape and Zoning.