Commercial mortgage for children’s day nursery

Looking to buy or remortgage a children’s day nursery? Steve Bedford, expert commercial mortgage adviser, looks at the funding options available including the rates you can expect to receive...

It may come as no surprise that the children’s nursery sector is becoming a very attractive market from both a business and investment perspective.

Businesses operating in this sector have seen a significant increase in demand, due in no small part to the number of working couples who chose to continue working whilst having a young family. This is partly because they have a desire to maintain the lifestyle to which they have become accustomed whilst without children, but also because it is a great way to explore a new career.

I have been successful in helping customers raise funds:

• To purchase existing businesses
• To buy out retiring business partners
• To expand nursery premises
• To buy another unit to use as nursery premises
• Against an unencumbered nursery let as an investment to existing operators.

Day nursery experience is crucial
In this sector, if you are looking for a mortgage to purchase and run an existing day nursery, then experience is absolutely key. Most lenders will only fund experienced, child care professionals with appropriate qualifications and a minimum of 2-3 years proven track record in a management position of an established nursery.

A typical, successful applicant would have the above experience, the required CRB clearance and the business should have a recent satisfactory Ofsted report with no significant areas of improvement required.

This doesn’t mean that there aren’t options for potential operators looking to make their first day nursery purchase but you must be able to prove you have specific experience in the industry.

This applies whether you are looking to run the nursery yourself, or put managers in to run the establishment for you. Lenders also prefer potential borrowers to have relevant management qualifications as there is a lot more to running a nursery than merely minding children.

For example, any the following qualifications are usually acceptable:

• NVQ Level 4 in Children’s Care, Learning and Development
• NQF Level 4 Certificate in Early Years Practice
• Cache Level 4 Certificate in Managing Quality Standards in Children’s Services

If you don’t have the management qualifications then retaining the existing manager or even the vendor could be an option.

Assessment of the trading accounts
As expected, any lender will want to scrutinise both the Ofsted report and the trading accounts of the nursery to feel comfortable that it is suitable and that the loan can be serviced. Whether purchasing a lease or a freehold you will need to provide the latest three years’ annual trading accounts. Lenders will then assess the ability of the business to meet the mortgage repayments taking account of anticipated drawings and ongoing cost etc.

It is worth noting that this type of business is often taken on by one spouse, whilst the other continues in an often highly paid job in which case surplus earnings from that source may be taken into consideration when the bank is assessing the ability of the business to repay the mortgage.

What sort of day nursery should you buy?

• Freehold day nursery: The purchase or refinance of an established, successfully trading day nursery in a desirable location is preferred by lenders. Most also favour nurseries which can accommodate larger numbers of children because of the economies of scale. The number of staff (and hence cost) required can have a huge impact on profits. Day nurseries should make between 25-30% adjusted net profits and the value of going concerns can be as much as 7-8 times the profitability.
• Leasehold nursery: When purchasing a leasehold, lenders typically require supporting, tangible security, i.e your home or any other property you may own. In the absence of this, some lenders may provide an Enterprise Finance Guarantee loan which means you get the backing of the Government. Bear in mind that the loan term offered to you is unlikely to exceed the length of the remaining lease. Leasehold trading business can be valued at as much as 3-4 times the profits and up.

Mortgage rates for day nurseries

Expect to receive:
• Rates - starting from as low as 2.2% above Bank Rate for prime applications
• Lender arrangement fees - from 0% - 2% of the loan amount
• Maximum term of 15–25 years capital and interest (for 25 years for borrowers with a strong track record in the industry and large deposit). Interest only terms tend to available on a 6–12-month basis if the purchasers intend carrying out work to improve the property.
• Loan to value - generally between 55% and 70%. If supporting security is provided, banks may lend more than 70% although if part or all of the deposit is being raised by way of a re-mortgage of another property then the lender will take the cost of repaying that into account when calculating the ability of the business to repay the mortgage.
Mortgage application processing times for nurseries
Application processing times vary, ranging between three and seven months. If this is your first purchase you could be looking at nearer the seven-month end of the scale, as you will need to allow for CRB checks and other regulatory requirements to be met, plus time to prepare the mortgage application and attend an interview with the lender (don’t panic – we’ll hold your hand through the entire process).

How to apply for a loan to buy or re-mortgage a nursery
In the first instance please feel free to telephone me so that we can discuss your requirements in outline before sending you an application form. Alternatively, I am always happy to meet you at the day nursery in question. To speed up the process and enable me to obtain an indication a lender’s likely terms I will need:

• The latest 2-3 years’ accounts for the nursery you are looking to finance
• If you are an experienced operator – last three years’ account for your main nursery
• An overview of your background and experience (CV if available)
• Copies of your latest six months’ personal and business bank statements
• A schedule of your assets and liabilities
• Proof of your identity and address
• Sales’ particulars for the business, e.g. management information from last trading accounts to date.
• Last two Ofsted reports – showing no major issues with the business

Remember, please do feel free to call us for a confidential chat if you are considering purchasing or remortgaging a children’s day nursery. We are always very happy to share our wealth of knowledge and offer advice to assist you in your decision-making process.

I can be contacted directly on:
Email: steveb@mortgagesforbusiness.co.uk
Or you can call the main number 0345 345 6788  (Option 2)

If you already have a mortgage broker but they are not experienced in this sector or do not have direct access to lenders which operate in the day nursery sector, do ask them to get in touch with us. We regularly work in partnership with other brokers – that way you get to keep your relationship with your existing broker and get the deal done. It’s a win-win-win all round!

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