Conventional Commercial Loans:
- Conventional loans for childcare centers are generally up to 75% (and sometimes 80%) of the real estate appraised value. They are amortized over 20 to 25 years. The loans generally have a 5, 7, 10, or 20 year maturity. Interest rates can be fixed for 5, 7, or 10 years; or some lenders fix the interest rate for the first five years and then re-fix the interest rate for the following five years at the going interest rate in five years. Fixed interest rates for 5 years are generally 6.0% to 6.75% for owner occupied childcare centers doing well (and sometimes 5.75% for well performing franchised centers or owners with multiple childcare centers). (Rates as of December 2018 with the prime rate at 5.5%.)
- A low fixed rate conventional loan can be the best to refinance away from a SBA 7(a) loan that has a variable interest rate.
- A conventional loan is often the only way to finance a childcare center if the borrower has outstanding tax liens, recent bankruptcies/foreclosures, or is not current on government-related loans.
- For childcare centers, conventional lenders generally require the loan amount to be a maximum 75% (and sometimes 80%) of the appraised value of the real estate. A few conventional lenders will also lend to up to 75% of the business value.
SBA 504 Loans:
- About 44.4% of the total loan is a FIXED rate for the entire term of the loan (up to 25 years) – current rate on this portion is about 4.9% to 5.25%.
- About 55.6% of the total loan can be either:
- Fixed rate for the first 5 years – depending on the project & borrower’s credit score, the interest rate on this portion of the SBA loan is generally 6.00% to 6.75%.
- Variable rate – interest rates are generally the Prime Rate +1.25% to +1.9% – the current rate on this portion is 6.75% to 7.40%.
- Combining the two portions of the SBA 504 loan together, the combined fixed interest rate for the first 5 years can be as low as 5.75%.
- Requirements: Minimum credit FICA score is 660… can refinance up to 85% of the real estate appraised value. Only a 10% down payment is required on acquisitions of operating childcare centers, or starting up a new location. No equity injection is required for refinancing.
- A SBA 504 loan is often the best to refinance away from conventional loan if you expect interest rates to increase, or you want the security of having a loan that will never be called or have a balloon payment. (By not having to refinance every 5 to 10 years, it can also eliminate loan closing costs in future years.) It can, only in limited circumstances (expanding a current facility or adding a new facility), be used to refinance away from a SBA 7(a) loan. An SBA 504 loan is also the best to finance an acquisition of a childcare center if there is less than $500,000 of goodwill being acquired.
SBA 7(a) Loan:
- A SBA 7(a) loan can be either fixed or variable with up to a 25 year amortization.
- The variable rate can be at Prime +1.75% for childcare centers for acquisitions and even lower for well performing centers, loan refinancing, and franchised childcare centers. With the Prime Rate at 5.50%, the current rate could be 7.25% to 7.50%. For acquisitions of a well preforming franchised childcare center, the rate could be as low as 6.0%. The maximum rate on a SBA 7(a) loan is the prime rate + 2.75%.
- A SBA 7(a) fixed interest rates can generally be fixed for a limited time (3, 5, 7, or 10 years). Interest rates for fixed interest rate SBA 7(a) loans are higher than variable interest rate SBA 7(a) loans.
- Requirements: No equity injection required for refinancing. Refinancing loans can be up to 85% of the appraised value of the real estate and business. For well performing franchised childcare centers, only a 10% down payment is sometimes required to start a new location. To buy an operating childcare center, normally a minimum of 10% down payment is required. A SBA 7(a) loan can, only in limited circumstances, be used to refinance an existing SBA 7(a) loan with a higher interest rate because of SBA regulations.
- A SBA 7(a) loan is best for financing the acquisition of a childcare center when substantial goodwill is being acquired, and for smaller acquisitions where SBA 504 lenders are not interested. A SBA 7(a) loan is used to refinance away from a conventional commercial loan if you want the security of having a loan that will never be called, or have a balloon payment, instead of refinancing it every 5 to 10 years.
United States Department of Agriculture Business & Industry Loans (USDA B&I):
- The USDA B&I loan can have a fixed interest rate with up to a 30 year term.
- The interest rate can be as low as Prime +1.25% to +1.75% for childcare center loan refinancing. With the Prime Rate at 5.50%, the current interest rate could be 6.75% to 7.25%. The USDA charges a 0.5% fee on the remaining balance of the loan. This makes the effective cost 7.25% to 7.75% of the loan balance.
- An USDA B&I loan interest rate is generally fixed for 5 years and reset each five years for the life of the loan.
- Requirements: Refinancing loans can be up to 80% of the appraised value of the real estate. No equity injection required for refinancing. An USDA B&I loan can only be used in areas with less than 50k population. (This map shows eligible areas) Many areas on the outskirts of major cities are still eligible.
- An USDA B&I loan can be best for re-financing away from a SBA 7(a) loan. An USDA B&I loan is used at times to refinance away from a conventional commercial loan if you want the security of having a loan that will never be called, or have a balloon payment, instead of refinancing it every 5 to 10 years. (It also eliminates future closing costs associated with refinancing a conventional loan every 5 to 10 years.) An USDA B&I loan can be used by both owner-occupied businesses and landlords. The USDA B&I loan program is the only government guaranteed loan program that landlords qualify for! An USDA B&I loan is often the best loan to lower the borrower’s risk of loan default in difficult economic times because: 1) It has the lowest monthly payments because the loan is amortized over 30 years. 2) If the borrower makes additional principal payments, future monthly loan payments are reduced even more!