Despite the clear market opportunity the expansion of Government-funded hours represents, many nursery owners I speak to say they are struggling to capitalise on it because they can’t find the finance they need to do so.
This is a result of the cautious approach high-street banks have taken to SME lending in recent years to small and medium enterprises (SMEs) in light of climbing interest rates and unfavourable macroeconomic trends.
Recent figures from UK Finance in fact revealed that gross lending to SMEs dropped 22 per cent in 2023 compared to 2022. In pursuit of ‘safe bets’, high-street banks have instead been actively competing for corporate customers with attractive interest rates and other perks that aren’t filtering down to SMEs.
With the rush to expand provision and meet what’s likely to be unprecedented demand over the next 12 months, raising finance for existing operators and supporting new entrants is going to be critical. From purchasing new facilities to growing teams, the nursery sector is going to need capital.
So, how can providers raise finance in a difficult market and ensure they’re well placed to offer ever more places over the next 12 months?One of the reasons for the reluctance on the part of high street banks when it comes to lending to the nursery sector is the complexity of finance applications.
There are many dynamics playing into this complexity, ranging from sector specific headwinds such as supply and demand, staffing and regulatory compliance through to the political environment. On the staffing front, there is a competitive labour market where less demanding roles for comparable pay seek to attract staff away from the sector. At the political level, many are nervously awaiting the new Chancellor’s first Autumn Statement at the end of October. While it seems unlikely that the expanded nursery provision will be reversed or amended, many banks will wait to see before lending to the sector. Then there is, of course, the cost of inflation affecting food, energy and property maintenance prices.
For many banks, the intricacy of the sector is too much and the expertise and sector knowledge to truly understand these vital businesses is lacking. Thankfully, there are now lenders who are rushing to fill the gap that the high-street banks have left.
To make finance applications simpler, there are steps nursery leaders can take.
For one, make sure you are regularly monitoring your KPIs – such as occupancy, fees, staff, and other cost ratios – to compliment your annual accounts and management information. Ensuring you are keeping on top of your regulatory compliance will evidence to the bank that you are providing good quality care. Also, being open and honest in conversations with a bank will allow them to find the best solutions for your business.
For those first-time buyers looking to acquire their first nursery, in addition to the information above, a robust business plan will give banks clarity of your future plans. The lending journey can take time, with credit approvals, valuations and legal checks all needing to be undertaken. In advance of September next year, those nursery operators looking to grow should be engaging advisers and banks as soon as possible to get the process underway, so they are well prepared for the increased demand.
