Nursery business finance for day nurseries and pre-schools

Nursery finance makes sense only once you see how money comes in, because it arrives through two very different routes.

• Parent fees. Privately paid hours, meals and optional extras are usually invoiced monthly in advance. Some parents pay part of their bill through Tax-Free Childcare, which lands from the government scheme rather than the parent's own account.
• Funded entitlements. Government-funded hours are paid by the local authority at its own hourly rate, on its own payment schedule, with adjustments after each termly headcount. The DfE's operational guide on early years entitlements funding sets the rules councils follow, including how they pay providers.

The expansion of funded hours to working parents of children from nine months old has moved much of a typical nursery's income from parents to councils. That makes the local funding rate, and how it compares with your cost per child hour, the single most important number in many applications. Funded hours cannot be topped up with a compulsory charge, so the margin has to come from privately paid hours, optional extras and efficient staffing.

• Adding capacity for younger children. Demand for baby and toddler places has grown with the entitlement changes. Converting space into a baby room means nappy-changing and sleep areas, and staffing at tighter ratios.
• Opening a second setting. Fit-out, Ofsted registration, recruitment and months of wages while occupancy builds.
• Buying the building. Many nurseries operate from converted houses, church halls or former offices on short leases. Buying the freehold removes rent reviews and secures the setting's future.
• Outdoor space and kitchens. Canopies, surfacing, garden rooms and kitchens that can handle hot meals for larger numbers.
• Refurbishment after an inspection. Where Ofsted has raised concerns about premises or safety, works may need to happen quickly.
• The summer dip. Children leave for reception class in September, and places are not always filled at once. Cash can tighten between July and October.
• Buying another nursery. See our dedicated guide to buying or expanding a nursery group.

Registration on the Early Years Register belongs to the provider, which is the legal entity running the nursery. If you set up a new company or buy a nursery's assets, the new provider must register before it can operate. Acquire the registered company itself, by buying its shares, and the registration continues, though Ofsted must be told about changes to the people running it. Lenders will want the timetable to reflect this. GOV.UK brings the requirements together in its collection on starting a nursery or other daycare and running the business.

• Rates you do not control. Funding rates are set locally and can lag rises in the National Living Wage and employer National Insurance. Test repayments against a year where costs rise faster than your rate.
• Expanding ahead of staff. A new room that cannot open for lack of qualified staff still costs money. Recruit before you borrow for the build.
• Personal guarantees and security. Guarantees put directors' personal assets behind the business debt; secured loans put the property at risk if repayments are missed.
• Grants first. Some councils have run capital grant programmes to create new places. Check whether one applies before borrowing for the same work.
• Tax timing. Most childcare is VAT-exempt, but corporation tax and PAYE still fall due on fixed dates. Weigh an instalment arrangement with HMRC against borrowing: comparing Time to Pay with a tax loan shows how each affects cost and your record with HMRC.