Loans Are Nothing To Kid About
Credit unions looking to deepen their roots in the communities they serve and open up a whole new lending market for themselves in the process may want to consider offering childcare loans, a specialized form of member business lending that can really make a difference in the community.
The Ithaca, N.Y.-based Alternatives FCU, Santa Cruz Community CU in California, and Self-Help CU in Durham, N.C.-community development credit unions all-have been offering member business loans tailored for child care centers and in-home providers and suggest there are big benefits to the credit union, the member and the community when these loans are part of a CU's offerings.
Alternatives has a three-pronged approach to child care lending, starting with loans to home-based day care providers.
"Most of these are cases where the member needs to make improvements to the real estate in order to be certified by the State of New York to run a child-care center out of the home," CEO Bill Myer explained. "If you want to be able to serve people who receive benefits, you have to be certified. There's a special way the windows have to lock, for example; it's a lot like ultra childproofing a home."
These are relatively small loans with somewhat short terms because of the nature of the business.
"We've seen a lot of home-based day care providers rotate in and out of the business quickly. It's not that they're unsuccessful, it's just the way this business works," he noted. "In a lot of cases, it's a situation where a family has a child, and one of the parents wants to stay home, but that means giving up that second income. This allows them to stay home and bring in a little money. Then when the child grows up and no one has to stay home, they move on. So, these are people who don't want to spend a whole lot of money investing in the business."
Indeed, a big part of this particular loan offering is helping the would-be day care provider determine if it's worth going into business in the first place.
"This is not a huge portfolio piece for us," Myers commented. "But we're helping people do the financial analysis so they can see that this is what they are going to have to spend to be certified, and if they spend this much, then they have to be in daycare for this long, or they have to provide daycare for this many children."
The second tier of childcare lending is for site-based daycare centers. Such loans tend to be bigger and more long-term, since these are larger businesses that are in it for the long haul.
"We are about three-quarters of the way through a deal right now," Myers told The Credit Union Journal. "They are renovating a facility, and they have multiple streams of financing, but there's a gap and we're financing the gap."
But it's the third area that Alternatives has gotten into that really sets it apart.
The 'Edgy Option'
"The third option is more edgy," Myers offered. "We participated in research Cornell University did that really delved into the problems with daycare in our county. Parents pay too much of a percentage of their income for daycare, and even though parents are paying too much, daycares don't have much surplus and their workers aren't well paid."
One of the first questions the study looked at was how much parents should be spending, and the result: about 10% of parents' income should cover daycare, and for those people for whom 10% doesn't cover daycare, there should be subsidies available.
"Our first thought was to create an endowment, raise the money and then help provide those subsidies. But it would have meant some $20 million. We quickly saw that was a pipe dream," Myers related. "So we joined a consortium to look at how else can we make a dent in this problem."
Among the ideas the consortium looked at is establishing flexible spending accounts, where employees can save money for a number of different things-including daycare.
"We proposed the council establish a central payer, where people who want daycare can have a single place to put in an application for daycare, be matched up with an appropriate provider and then all the billing would go through the central payer, and that would standardize the process and set up a standard of 10% [of parents' salaries to be used as the sliding scale for payment]," he said. "We threw in $25,000 to set up the central payer system, and applied for and won the grant, which we subgranted to them."
Getting this involved in the process isn't for every credit union, but childcare lending is well worth getting into, even for credit unions that aren't CDFIs, Myers suggested.
"It's provident and productive lending, and that's what credit unions are supposed to be about," he advised. "I don't have to know all the details about how someone gets certified or what they have to do for that, because I've established the connections with our local Daycare Council. Really, it's pretty simple stuff, when you're talking about in-home providers. The site-based facilities are bigger loans and require a basic strategic plan for the business-essentially it's no different from any other business loan."
For credit unions considering getting into the childcare lending business, Myers recommended contacting the local daycare council and letting them help ascertain what the daycare needs of the community are and how the credit union can help. "You don't want to be the driver of daycare issues," Myers commented. "But so many of these people don't even know they're eligible for a loan at the credit union, so that's the first step."
A Revolving Loan Fund
Santa Cruz Community CU also offers childcare lending on a couple different levels. The CU helped establish a Child Care Revolving Loan Fund that goes to family-based and other child care centers. SCCCU is also involved with the National Community Capital Association, which has a childcare financial program. A large portion of that fund goes to an affordable housing complex that has on-site childcare with about 40 or 50 slots open to residents.
"We'd like for that to be a kind of model," said SCCCU's Sheila Schat, who noted that affordable housing and affordable daycare are two issues that often go hand in hand.
But the credit union also does simple member business loans for childcare, as well. "We have loan policies that are consistent with other small business loans," she noted. "In all of our loans we use character-based assessments, and that sometimes means somewhat higher risk."
As would be expected of a community development CU, Santa Cruz has made a point of partnering with the community it serves to determine how it can provide support on an issue that can make or break a community as easily as it can make or break a family.
"We have collaborated with the county to try to help make childcare centers last longer in the county," she said, echoing Myers statements about the impermanence of some daycare providers. "We're trying to ensure that they stay in the community, because there is always somebody in need of these services. We linked up with the childcare community a few years ago, and it's been tremendously rewarding for us."
Credit unions interested in getting involved in the community in this way should look for good partners. "Probably every county has an organization, usually that's part of the Department of Education, like the Childcare Planning Council that we work with. I attend their meetings once a month. That's the key."
To one degree or another, most credit unions probably are involved in childcare lending, whether they realize it or not, according to Karen O'Mansky of Self-Help Credit Union.
That's because many home-based daycare providers are relying on home equity loans or other types of loans to finance their small home-run business.
"Self-Help has always done childcare lending from the start as part of our commercial lending program," she noted. "When we realized that we probably get more calls for childcare loans than any other industry, we applied for and got a small grant in 1993 to survey the portfolio and childcare providers in the state. What we found was that often times, these people couldn't answer a lot of the questions they had to deal with, both in terms of financial needs and technical assistance."
SHCU partnered with the state to establish a revolving loan fund of about $500,000.
"Now we have $4 million in the pot, and we've made about $2 million in loans," O'Mansky noted. "The partnership is perfect. They've become experts on the business side of the childcare industry. They know how to set up a good quality program, and we now how to get it financed."
The Due Diligence
O'Mansky said any credit union interested in offering childcare lending should get up to date on what sort of licensing regulations are in place in their area and ensure the CU is lending to a program that is properly licensed.
"For the most part, you can treat this like any business loan. But just like any other small business, you may find that they really need some basic technical assistance," she expalined. "You may find that it's a good sector to target, but you may need to change the materials you give out to these people so they get the information they really need."
Although SHCU does more loans to site-based childcare centers, a quarter of its childcare loans do go to home-based providers. Because the dollar amounts on those loans tend to be so much smaller, they probably only make up about 4% of the money loaned out, she noted.
"Really, what it comes down to is this-we a saw a need, and we were getting a ton of calls," O'Mansky related. "We saw a financial need that was not being met by the banks, and we see childcare as a way to strengthen the community. That's what we're all about."