7 Ways To Expand Your Nursery Without Traditional Loan From A Bank

Despite the 30-hour funding crisis and the various challenges you face as a Nursery owner (people, planning, regulations, paperwork and getting parents to pay on time) you remain optimistic and want to open up one or two more settings.

However, you don’t fancy the traditional route of bank finance.

Perhaps you need £50,000 to employ more people, pay the rent and invest in sales and marketing?

 This article looks at ways to expand your setting including 7 alternatives to a bank.

• Recruiting and Rewarding Staff

Parents want their children to be looked after by the best staff and they appreciate continuity of staff. As a nursery owner, you know the feeling at month end when your biggest cost gets paid out.

To avoid the temptation of allocating a fixed budget of your funding to fixed amount of hours worked irrespective of output, try introducing incentives that drive performance.

You can look at performance and tax efficient employee share option schemes.

Imagine a scheme where you’re able to retain senior staff for say 3 years, they get incentivise to drive performance and they get more money in their pocket. In addition, you get to reduce your monthly outgoings and PAYE bill. All of a sudden you will find that you don’t actually need to that  20k funding for staff.

This means you can keep the bank manager at bay and still expand your setting without losing too much cash up front.

There are a few tax efficient incentive plans and certain conditions to meet. Please do explore these with your accountant or tax advisers to guide you through the options.

• £10k Internal Funding. Avoid Cash Leakages

Very often the hidden cash within most setting is vastly ignored and the temptation is to seek for extra cash elsewhere.  Many settings struggle with cashflow due to a combination of lack of marketing, low profits and lack of fee collections.

For example did you know that if you make say 10% profit margin and a parent owes you £1,000 and never paid, you have actually lost a whopping £10,000? So in other words, you will need to get a fee of £10,000 to make back that £1,000 you lost (10% of £10,000 = £1,000)

And what this means is that if you don’t make that £10,000 in fees, then you’re having to borrow to fund that amount to keep you going. This is one leakage that need to be blocked so that you have less need for funding.

• Funding Options For the Property

For most settings, rent is the second biggest cost you incur in running your nursery. Just as you did with recruiting and rewarding staff, are there other ways to fund the property and rent? Perhaps low rent including subsided church building, local authority properties and empty premises might offer a good start to get the second setting up and running. Or if you have to pay market rent for a commercial property, could you leverage the building and get additional income streams by offering after school clubs, parties at the weekends, or using the space for clubs in the evenings?

And have you thought of a tax efficient way to acquire the commercial property personally and rent it to the Nursery? 

• Attractive Tax Breaks For Investors

If you run your setting through a limited company, another avenue to explore is to attract investors to fund the expansion of your next setting. Investors are always looking to reduce their risks and one way to do this is to offer them a tax efficient investment where they can reduce the amount they put in through tax backs.

Imagine persuading an investors to invest £100,000 but then they get £50,000 income tax relief back (provided they’ve paid that amount of tax already). So they only have £50,000 of their money at risk. Let’s assume things don’t go well with their investment and they are a higher rate (45%) tax payer. They can claim an income tax loss on the remaining £50,000 (£50,000 x 45% = £22,500). So out of their original £100,000 they now have a total of £72,500 back (the original £50,000 + the subsequent £22,500). This represents a massive 72.5% tax relief.

Many investors would not mind investing, would they?  

There are a few tax efficient investment options. Please do take advice before proceeding.

• Alternatives To A Bank

Apart from the bank of friends and family and personal funding, here are 7 alternatives to a bank

• Business Angels
• Crowdfunding
• Grants and government-backed loans
• Kickstarter funding
• Incubators and accelerators
• Venture capital
• Peer to peer lending

• Franchising or Licensing

Rather than go it all alone, franchising or granting another person a licence to use your Nursery’s name and systems can provide a quicker and less capital intensive route to expand your setting.

This is where someone else provides the funding needed to open another branch in your name. They pay you an initial amount for training and on-going fee based on income. The duration could be 3-5 years after which you both review to see whether the relationship is worth carrying on.

If you go down the franchise route, always advisable to seek advice and test the market first with what is called a Pilot Franchisee.

You will need to invest some time or money into getting your systems right but this will always benefit your Nursery even if you don’t end up using this route of funding.

• Collaborating With or Acquiring Your Competitors

Have you thought about collaborating with or simply acquiring your competitors? I mentioned the 30-hour funding crisis at the start of this article because according to a recent survey, about 49% of Nurseries do not make a profit and more nurseries are closing their doors partly due to the 30-hour funding. Instead of starting another setting from scratch, would it make sense to talk to some of your competitors to see if you can either collaborate or help them out by taking over their setting? This way you avoid the long haul. Plus you don’t need large sums of money to buy another Nursery. You will be surprised what deals you can make. Very often and depending on the motive of the vendor, you may be able to simply release them from stress and provide some form of continuity for the children without putting a lot of money down. You can then look at areas to improve the setting and use the current fees to fund working capital.

But please do proceed carefully with this and involve your professional advisers to ensure you minimise your risks.