Are you wondering what lenders look for when evaluating a daycare for business loan? If YES, here are 6 things to note in 2023. According to industry reports, the U.S. daycare industry is valued at over $48 billion and grew 1.3% annually over the last five years. Note that the number of U.S. single-parent households is on the rise; so is the percentage of families that need both parents to work in order to make ends meet.

As the daycare industry expands, more business owners than ever are choosing to expand their operations—whether through commercial real estate, technology upgrades or other business investments. So if you are one of the various daycare businesses looking to expand, it’s imperative to understand the complex world of financing.

When looking to expand, it can be difficult—or impractical—for owners to shoulder the expenses involved in these investments as they manage the day-to-day affairs of their daycare business. If this sounds like your situation, commercial loans are worth exploring.

As a daycare business owner, you don’t have to cut corners when it comes to Department of Children and Family Services requirements and other licensing. Also, you shouldn’t cut corners on your financing, either. A good child care business loan is a loan that aligns with your needs, full stop. Therefore, understanding what it is you need from the capital you are borrowing is a huge part of finding a good match.

A good daycare business loan is also one that boosts your business and lets you accomplish what you intend to, which entails getting a hold of enough—but not too much—capital. 

A good business loan will have terms that your daycare can realistically meet knowing your revenue expectations, seasonality, and cash flow patterns. When looking through your child care or daycare business loan options, start with what you intend to accomplish. If you have a few different goals you intend to accomplish with your funding, you won’t want to take out any business financing that isn’t flexible enough for your needs.

Note that you may not be eligible for the loan or financing option you want the most (an SBA loan is more difficult to qualify for, for example). But, by understanding everything about your different loan options for your child care business, you might be surprised at some of the alternatives that are within your reach.

What Lenders Look for When Evaluating a Daycare for Business Loan

 1.     Your Daycare Credit Score

Have it in mind that the better the credit score of your daycare, the higher the chances of being granted a loan from any given financial institution. If you are wondering how money lenders get to know your business or at times your personal FICO score? Then read on!

Note that your daycare credit report is a document that contains different information which is used by credit bureaus in terms of calculation of either your daycare or personal score. The factors considered in calculating the credit score include credit utilization ratio, how often you open new credit accounts, credit inquiries, and how fast you clear your money credited to you by your previous lenders.


2.     Your Debt to Income Ratio

When examining business creditworthiness for your daycare, many lenders tend to consider the debt to income ratio of your business. Note that any business owner can calculate this ratio by taking the sum of their monthly obligations and dividing them by the total monthly income generated by the business. This ratio should never exceed 36. Mathematically, the lower the ratio the better!

Any business whose debt to income ratio is very high has a higher risk to forfeit in payment. This is a red alert to lenders not to lend money to such a business. Therefore, it is very imperative for business owners to pay their debts in order to lower this ratio to a minimum point possible.

 3.     Credit Repayment History

Have it in mind that this is a very pertinent factor that a lender uses as priority before extending credit to any business. Note that to gauge your creditworthiness, lenders look for a credit report from the credit bureaus. The credit report contains information such as your credit accounts, the credit inquiries that your daycare makes, and lastly your history of repayment.

On the credit report, a good number of the most important indicators that lenders look for are how many times you have defaulted in payments as well as any history of bankruptcy. When you have a very poor record of credit repayment history, no lender will give you any form of credit.


4.     Available Collateral

When you are applying for loans from different institutions, note that most of the times you are expected to have collateral pledged as security. This is an asset that lenders may sell to recover their money just in case you default in loan repayment. Most of the assets include real estate, land, and machinery equipment.

It simply means that any business which has valuable assets can have their loans approved within a short period. Nonetheless, remember that at times, a business can go for unsecured loans though this needs a very stable business with a high credit score and good repayment history.

With every other factors constant, any daycare with a valuable piece of collateral will be given a huge sum of money in the form of a loan compared to a daycare whose value of security assets are very low. If you have collateral whose value has depreciated, then it is good to apply for a small loan which matches the value of the collateral.


5.     Your Daycare Financial Standing

Note that most financial institutions such as banks and other financial institutions tend to demand for your daycare’s last year’s financial statements, balance sheet and an interim financial statement of the recent months. Other financial statements that you need to have included are the income statement and cash flow statement.

Have it in mind that these statements will offer an insight about the financial position of your company or business. If your daycare is very stable, then many lenders shall be able to grant you credit since they will have the belief that indeed your daycare has the needed ability to repay debts. However, if your daycare has so many debts, no one would want to risk their money on you.


6.     Application History

Ideally, shopping around widely for a good loan makes perfect sense. Not so for business loans. Potential borrowers have inundated lenders with competitive offerings. When a lender does a credit check on an application, that lender can see a record of all the other credit checks that other lenders have performed, regardless of whether a loan was approved or denied.

Note that seeing multiple credit checks by their competitors on an applicant is a red flag and is perceived to be an indication that the client may have been turned down by the other lenders.


As you start and build out your daycare business, you will understand a lot—and one of those things is the kind of capital that you need on a daily, monthly, and annual basis. Note that part of being successful is being prepared, so don’t wait until you are in a capital crunch to apply for daycare loans. Remember to work with your accountant to know your numbers inside and out, and pay attention to trends in your financial statements, especially your cash flow statement and profit and loss.