Ray Moll, Guild
Commercial Finance
With the banks more cautious and funds harder to come
by, financing your child care centre may not be easy.
It’s important to speak the bank’s language and
understand the key criteria by which they assess your
suitability as a borrower. By considering the bank’s
requirements, with the right help, you can present your
position more effectively and negotiate the right
long-term financing solution for your centre.
While the banks are still lending money to child care
centres they don’t have any appetite for taking on
unmitigated lending risks. Recent economic conditions
have resulted in approval conditions getting tougher and
if your application isn’t ‘top notch’ you needn’t
bother.
The success of your application will be based upon a
number of factors including:
• your management experience and qualifications
• the nature of the business you are buying (child
places, child ages, occupancy level, staffing)
• competitive threats
• the strength of your financial plans
• your contingency plans
It’s critical to send the right signals to your lender
to ease their concerns and present your business
position in the best possible light. To communicate
effectively with the banks you need to speak their
language. When the banks are deciding how much to lend
you and are reviewing the ongoing viability of your
position this means they are looking at the
Serviceability and Security of the loan.
Serviceability refers to your ability to pay back the
loan. You need to demonstrate that you have sufficient
income and contingencies to meet your loan repayments.
The banks will look at your forecasts for two key
measures for serviceability:
• ICR (Interest Cover Ratio) which measures earnings
before interest and taxes divided by your interest
expenses, and
• DSR (Debt Service Ratio), which provides a simple
measure of the total debt of a business compared to its
income.
What figures are required on these measures varies
according to each situation and needs to be negotiated
in your financing agreement. Generally, larger more
established businesses will be able to take on larger
amounts of debt.
Security refers to how much of your loan is guaranteed
by business and/or property assets. The key measure here
is LVR (Loan Value Ratio), which is the percentage of
your loan against the valuation of your business and/or
property assets.
The security required on a loan is generally 70% for
freehold and 50% on leasehold businesses in child care.
Keep in mind that you need to demonstrate your
Serviceabiliy and Security on the loan not only at the
time of purchase but throughout the term of your loan.
It’s therefore more important than ever to ensure you
have suitable conditions for the loan, as banks are
being more vigilant chasing up borrowers who don’t meet
the conditions of their loan. Negotiating suitable
conditions for your financing agreement now means that
your loan won’t come back to haunt you down the road.
Interest rate movements and how they affect your loan
covenants
The graph below shows the movement in the BBSW (Bank
Bill Swap Rate) through 2008. The decrease in these
rates over time may, in some circumstances, have
improved borrowers ICR where earnings have remained
constant.
Borrowers taking out facilities at the lower end of rate
cycles however run the very real risk of breaching ICR
covenants as rates rise, should earnings not increase
correspondingly.
When rates are low, it’s even more important for
borrowers to have very clear projections of anticipated
earnings. With rates tipped to rise in the near future,
a decision made today may place borrowers under ICR
stress in the future. Without robust advice, a “cheap”
rate may actually end up costing a lot more than
expected should default provisions be enforced.
Let me tell you a story…
A child care operator had a $2.4 million loan. The
centre turned over $3.55 but despite meeting repayments,
the client failed to meet their ICR covenants and the
bank decided to call-in their loan. In the current
climate, the bank gave this client 90 days to refinance
their facility.
I helped the client refinance their existing facility;
increase their loan by a small amount and obtain a
slightly better rate. The problem however would never
have arisen had her support team been vigilant and
communicated with them and their bank on the centre’s
key performance measures.
How a financing specialist can help you
A financing specialist experienced in child care funding
can assist you through the process of negotiating a
finance agreement and advocate on behalf of your
business with the lender, throughout the term of your
loan.
Having an experienced financing specialist advocate on
your behalf can help you by:
• Independently casting their expert eye over your
finance agreement to ensure all is in order.
• Tapping into their extensive child care funding
specialist networks and long term relationships to find
the best financing solution offered.
• Creating clear lines of communication between you,
your accountants, valuers, and your lenders to present a
clear picture of your financial position of strength.
• Knowing how to ‘talk in the bank’s language’ to
communicate your position effectively to your lender.
• Advocating on behalf of your business with the lender
throughout the term of your loan.
If you would like the support of a financing specialist
to fund your child care centre purchase or review your
current facilities, Guild Commercial Finance specialises
in providing objective and independent finance solutions
to child care centre operators. Guild’s experience and
accreditation gives you direct access to all major
lenders, their products and their industry specialists.
But more importantly, we’ll assess and negotiate the
most appropriate solution for your business today – and
for where you want to take it in the future.
The current economic (and political) environment
probably hasn’t directly affected too many services just
yet but the possibility of reducing occupancies and
rising costs is very real. There are a number of ways
your service can prepare and adapt to these changes but
an effective method is to ask yourself: does my service
meet the needs of the community and provide a satisfying
work environment for my staff? If it’s been a while
since you have asked these questions then do it today!
Your service needs to review important issues that can
have a significant impact on the way your centre is
perceived in the community. This basic assessment
shouldn’t cost you anything in dollar terms, but the
information obtained will be invaluable. The results of
your assessments should then be distributed, shared and
discussed with all staff so that they and the centre as
a whole can benefit.
Ray Moll is a member of the Guild Commercial Finance and
has worked within banking and finance for over 20 years.
Ray and his colleagues specialise in Child Care and
Pharmacy lending, which has given the team, in-depth
knowledge of these industries and the specific financing
needs of Child Care professionals. Contact them to
discuss your funding needs by clicking on the link below
to complete an online enquiry form:
