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Using the SBA 7(a) for a Preschool
As the daycare industry continues to grow, there are some incredible advantages if you tap financing to propel your business to the next level.
In the United States, the daycare industry is expected to be one of the fastest-growing industries through 2020. If you’re ready to take on a business mortgage, the SBA 7(a) loan might be your path to starting a preschool.
The SBA 7(a) loan is offered through traditional lenders like credit unions and banks. Commercial real estate loans under the SBA 7(a) program —some with 25-year terms— can be as large as $5 million. Eligibility requirements are straightforward, and lenders typically require a simple 10% down.
How to Use an SBA 7(a) Loan for a Daycare or Preschool
You can use the funds from the SBA 7(a) loan for nearly any legitimate business need: equipment costs, land and real estate, and even working capital. For your daycare facility, you can use the SBA 7(a) for:
New Construction
Any of the costs associated with new construction can be covered by the SBA 7(a): educational materials, furniture, alarms and security, etc.
Refinancing a Preschool
The funds from the SBA 7(a) can be used to refinance an existing loan. There are specific conditions for the loan to be used this way; for more information, check out our page on Refinancing Debt. Learn More
Buying a Facility for a Daycare
Purchasing an existing site is a legitimate use of the SBA 7(a) loan. A daycare facility is not purpose-built, but must have adequate bathrooms and space for equipment, employees, and attendees.
Useful Post: How to Save Up a Down Payment for an SBA Loan
Case Study: Educating Little Ones in Little Rock
Helen, a passionate educator and entrepreneur in Little Rock, Arkansas, had been successfully running her preschool, Little Minds Academy, for several years. Parents in the community loved the nurturing environment and innovative teaching methods Helen provided, and her business continued to grow. Helen saw the potential to expand her reach by acquiring another preschool in the area, which would allow her to provide her exceptional educational services to even more families.
Helen first approached her local credit union to secure a business loan for the expansion. However, she faced challenges in obtaining the necessary funding, as the credit union was hesitant to provide a loan for a preschool acquisition, and their terms were not as favorable as she had hoped.
Undeterred, Helen began researching other financing options and discovered the SBA 7(a) loan program. She learned that this loan was an excellent choice for business expansion and acquisition, and it offered more favorable terms and interest rates than traditional loans. Helen reached out to a bank experienced in SBA lending and shared her vision for acquiring the second preschool and expanding her educational services.
The bank reviewed Helen's case and financials and approved an SBA 7(a) loan of $750,000 for the preschool acquisition. With the loan in hand, Helen successfully purchased the second preschool, rebranded it as Little Minds Academy II, and began implementing her innovative teaching methods and nurturing environment across both locations.
The SBA 7(a) loan allowed Helen to expand her business and serve more families in the Little Rock community, positioning her as a leader in early childhood education in the area.
This is a fictional case study provided for illustrative purposes.
Using an SBA 504 Loan for a Preschool
SBA 7(a) Loans can also help connect you with other government-backed loan programs, like the SBA 504 loan program. This loan is larger than the SBA 7(a), and can require a more favorable amount down for the borrower. The SBA 504 is typically used with a traditional loan to cover construction costs or the purchase of commercial real estate.
What Do I Do Next?
To learn more about the SBA 7(a) or 504 loan programs or to get a free quote, complete the form below to connect with an SBA lending specialist.
Related Questions
What are the eligibility requirements for an SBA 7(a) loan for a preschool?
The SBA 7(a) loan program is particularly suitable for childcare businesses because it allows the financing of goodwill and other intangibles. As long as commercial real estate makes up the largest percentage of the total, funding of up to $5 million can support franchising, renovations, and childcare facility operations.
There are some basic eligibility requirements for the SBA 7(a) loan:
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
What are the advantages of using an SBA 7(a) loan for a preschool?
The SBA 7(a) loan program is particularly suitable for childcare businesses because it allows the financing of goodwill and other intangibles. As long as commercial real estate makes up the largest percentage of the total, funding of up to $5 million can support franchising, renovations, and childcare facility operations. The SBA 7(a) program is a fantastic way for childcares, daycares and preschools to get assistance with commercial real estate financing.
In particular, preschools and daycare center owners can use SBA 7(a) loans to:
- Build a new preschool or daycare center. SBA 7(a) loans can cover nearly all expenses associated with construction, including security systems, safety equipment, and even furniture.
- Buy out a partner: If you’ve started a daycare center or preschool with a business partner, and they want to retire or move on to a different industry, an SBA 7(a) loan could be a fast and efficient way to buy their stake in the business.
- Refinancing business debt: If you have SBA-eligible business debt (i.e., a business loan that was used for legitimate business purposes), that is currently being offered to you on unreasonable terms, you may be able to refinance it with an SBA 7(a) loan.
- Purchasing an existing preschool or daycare: If you want to purchase an existing preschool or daycare business, you can do so with an SBA 7(a) loan. You can also use it to purchase an existing structure and upgrade/modify it to better fit your business.
What documents are required to apply for an SBA 7(a) loan for a preschool?
To apply for an SBA 7(a) loan for a preschool, you will need to provide the following documents:
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Business and affiliate financial statements, including a balance sheet, profit and loss, and income projection
The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.
What are the maximum loan amounts available for an SBA 7(a) loan for a preschool?
The maximum loan amount available for an SBA 7(a) loan for a preschool is $5 million. This loan is intended only for the purchase or construction of owner-occupied commercial real estate.
For smaller preschools or daycare centers, an SBA microloan may be a better option. This loan offers amounts of up to $50,000 and has significantly relaxed credit score requirements.
What are the repayment terms for an SBA 7(a) loan for a preschool?
The repayment terms for an SBA 7(a) loan for a preschool depend on the amount of the loan and the repayment plan you have in mind. Generally, the SBA 7(a) loan program allows for repayment terms of up to 25 years for real estate and up to 10 years for equipment. The SBA will only guarantee a portion of the loan, and you’re still responsible for paying the balance.
Learn more: Understanding How the SBA Guarantees Loans