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Children’s day nurseries are a fascinating business and lending proposition.
Their needs and profile, however, are atypical. As a broker, you might not have had much exposure to businesses of this kind. The complexity of their situation might be daunting or even off-putting.
While day nurseries are unique, they provide huge value to their local communities. It’s important that these businesses can access the finance they need to continue operating to a high standard and to grow, when in a position to do so. Recent legislative changes have made this more likely than ever.
The confluence of need and opportunity inspired the creation of our specialist commercial mortgage product for the sector. In our latest Brokercast, Garry Wilkinson and Brian Bovell (both Specialist Relationship Managers within our healthcare team) discuss the details of our approach to day nursery lending.
Developing specialist products in care
In creating a specialist policy and commercial mortgage product for childcare settings, Brian believes Allica has found “the final piece of care jigsaw.”
“When I joined a couple of years ago,” he explained, “we made a couple of iterations to our elderly care policy. That’s now entrenched in the market and working well. We then followed that up with our specialist care policy. The next obvious evolution of the healthcare team journey was to look at children's day nurseries.”
“Given the policy changes that are coming,” it was the right time to turn our attention to childcare.
The big change for day nurseries
On Brian’s mention of policy, Garry expanded on the changes that will “increase demand in the sector.”
A pivotal policy change was announced in March 2023: the expansion of funded childcare entitlement. Previously, children over three-years-old were eligible for 30 hours of government-funded childcare per week. Since April 2024, eligible families are now able to access 15 hours for two-year-olds, with further increases due in September 2024 and 2025 for nine-month- to two-year-olds.
Effectively, more families can access more childcare at a lower cost than ever before. So the theory goes, this should see more parents return to work and stimulate the economy.
Garry explained that “we've seen quite a large increase in interest and enquiries in children's day nursery applications in the last few months” already.
“We're not naive,” Brian stressed. “There will be challenges, from staffing to supply.” That said, “we think it's going to be buoyant over the next few years. For operators who may need finance, there'll be a real need and we want to support them.”
A growth opportunity rife with challenges
On the point of potential challenges, Brian said that the increase in government funding will be “transformational in many ways, but not without its challenges.”
“We know that many nurseries are already at capacity and, with increased demand, families might see long waiting times. Good operators will try to fulfil that demand, potentially with increased capacity or acquisitions.”
“Conversely, you've also got staffing challenges. Anyone entering the sector needs a passion because, let's be honest, there are easier jobs out there that probably pay comparable wages. And it’s not just any job, there are qualifications required.”
Businesses will have to work hard to recruit and retain staff, as increased demand has to equal increased staffing. Nurseries must maintain a ratio of staff to children. It’s not like a tech firm asking more of its engineers during a busy period - there can be no growth in childcare without a concurrent growth in employees.
A wide-angle lens on the market
In the face of a potential explosion in demand, Garry wanted to stress just how widely the team tries to look at the market. “We're committed to supporting the market and also the brokers that help people in that market. This is a truly vital sector for not just the wider economy, but families as well.”
One of the top priorities, Brian went on to say, was “to be inclusive for first-time buyers and experienced operators. That definitely sets us apart from the competition.” We want to support everyone from “established nursery operators looking at financing acquisitions or increasing capacity” to those newer in the market.
With the coming changes to childcare provision, the market won’t be sitting still. It’s likely that new businesses will form to help meet the increased demand - whether from experienced operators expanding, entrepreneurs extending their portfolio, or childcare professionals launching new businesses.
We’ve built a specialist team at Allica that understands the policy landscape and the challenges that operators face in this sector. Whatever we can do to help brokers better understand their clients’ needs, we want to do.
A good business plan oils the cogs
“For first time buyers in particular, a business plan matters,” Brian said.
“That's as much for the buyer as it is for the bank. We want them to do that research, understand what they're buying, document what's good about the business, what they think they might be able to change or modernise, and translate it into numbers in terms of a 12 month financial profit and loss forecast.”
“That allows them to understand a wee bit more detail about their numbers: expected income, costs, cash flow. Translating that across to the bank can make us more confident. We can then talk to our underwriters and vouch that they’ve done the research, they know the business and their numbers.”
“Brokers are instrumental in that,” Brian stressed. “They can help put all those bits of the jigsaw together and explain what banks want and what their client needs to get.
Brokers become even more important
Garry wanted to cast some more light on one of the most important factors in the equation. “We do a lot of work with our broker partners and know how important their role is in terms of guiding clients. That’s in terms of deal structure, the information they need to provide and how they need to prepare for applying for finance.”
“We sit within that challenger space and we have certain competitive elements, but we're not saying that we are a one-size-fits-all bank and will be perfect for every client. What we do want to be is the first choice for our brokers if they see a nursery deal, to at least have that conversation with us.”
Brian was in full agreement. “It’s all geared towards that positive outcome. We are trying to make the process as simple as possible and find the path of least resistance to get you a quick outcome. That’s ultimately what everybody wants.
“Brokers,” he reiterated, “can be instrumental in assisting on that journey.”
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