Magazine article Journal of Commercial Lending

Lending to Child-Care Centers

Magazine article Journal of Commercial Lending

Lending to Child-Care Centers

Article excerpt

Meeting the child-care needs of working parents is a challenge for American society and an opportunity for commercial lenders. The authors of this article outline the current issues in the child-care industry. They provide loan officers with the business characteristics and financial ratios needed to evaluate a credit to a child-care center.

Formal child care began in the mid-eighteenth century when the need arose to care for the children of working parents in France. In the U.S., the need to care for the children of working mothers during World War II led to the establishment of child-care centers dedicated to helping factory workers. Since World War II, the number of women entering the work force has steadily increased. Today, affordable, quality child care is a national concern. The U.S. government mandate for free public education does not extend to children under five years of age, so under the supervision of the states, the child-care industry attempts to meet the needs of working families with young children. Lenders can find many banking opportunities in this line of business.

Industry Background

Options in Child Care

There are three main options for nonparental care of young children: in-home care, family day care, and center-based care. All three options apply to children from infancy through the start of formal schooling. These options also apply to the afterschool care of children until age 13.

In the in-home care option, the caregiver comes to or lives at the child's home. The caregiver may be a relative, housekeeper, or nanny. In the family day-care option, a child goes to a caregiver's home and may be in the company of one or more other children. Most states limit the total number of children that one person can care for in his or her home. Most states also have some kind of licensing requirement for family day care.

Family day-care providers may need financing to improve their homes, but will usually borrow on the basis of personal credit strength. The group child-care center option will be the source of most borrowing requests in this industry. Group child-care centers are facilities that are suitable for about 8 to 120 children, cared for by state-specified numbers of trained adults, in settings designed for this specific purpose.

Market Size and Structure

Lenders looking at group child-care centers as a potential market see an array of entities with wide variations in size, quality, type of ownership, and borrowing needs. In 1990, there were approximately 80,000 child-care centers in the U.S. with a licensed capacity to serve more than 5 million preschool children. The average number of children at an individual center was 62.

Of the total universe of 80,000 centers, 65% are nonprofit organizations and 35% operate for profit.(1) Many nonprofit centers are owned by larger organizations, such as public schools, churches, synagogues, and the Salvation Army, and do not usually borrow independently of their parent entity. Centers operated by independent nonprofit organizations, which do need bank financing, number about 20,000 nationwide.

The for-profit market, totaling about 28,000 centers, consists of chains, such as Kindercare, that own and franchise a large number of centers and independent owner-operated or mom-and-pop entities. Although national chains grew some 200% in the 1980s, they accounted for less than 5,000 centers in 1990. The parent company of a chain may be a bank borrower in the state where it is headquartered. The independent for-profit sector, numbering around 23,000 centers, is the most likely source of borrowing requests.

Both nonprofit and for-profit center operators provide work-site care. That is, an employer provides space and often subsidizes occupancy costs to a provider, who offers care for the company's employees at the same or a near-by location. If the employer plays a role in obtaining financing for the center, a lending opportunity exists. …

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