Interviews for this article took place in mid-March of 2020, prior to many COVID-19 social-distancing measures, which have greatly affected child care markets and the work of community development financial institutions (CDFIs). A previous article highlights the challenges child care providers face during the COVID-19 crisis; another highlights the critical role CDFIs could play in recovery efforts. While the pandemic situation is fluid and much has changed since March, this article provides context for how CDFIs have been working in the early care and education (ECE) sector for several years and will likely continue to do so during and after the pandemic.
CDFIs—adaptable, mission-driven organizations that provide financial products and services in underserved markets*—are finding creative ways to expand the short supply of high-quality ECE. Creativity is in order, because certain aspects of the ECE market make traditional lenders’ conventional, off-the-shelf loan products poor fits for ECE businesses. For example, ECE’s labor-intensive business model and already low wages leave little to no room for cutting costs, and unlike many other firms, ECE providers can’t re-purpose or leverage their product. On top of that, the most expensive assets child care providers are likely to need—their facilities—often require investments for physical modifications to meet health and safety standards that apply to small children. Because those improvements usually are not useful to other businesses, a child care provider would likely have trouble recouping those costs in a sale of the facility.
In response to the unique challenges in the ECE market, some CDFIs have developed strategies for increasing providers’ operational capacity, expanding providers’ access to capital, and facilitating lending to the ECE sector by traditional financial institutions. CDFIs’ practices for pursuing these strategies fall into four categories, described below: analysis, technical assistance, adaptability, and partnership.
Using analysis to understand the local market
CDFIs typically make extensive efforts to understand people and places at a detailed level before designing their interventions. Some are bringing this emphasis on analysis to their efforts to expand the supply of high-quality ECE. Two key dimensions of CDFIs’ ECE-related analyses are understanding the balance of providers and analyzing the local real estate market.
Understanding the provider balance
The balance of providers among child care centers, licensed family or in-home providers, and informal and/or unlicensed providers (such as nannies or family, friend, or neighbor care) is an important feature of a local child care market. Reinvestment Fund, a CDFI with offices in Philadelphia, Baltimore, and Atlanta, developed regional estimates of the supply of informal care that have been critical for developing effective local strategies. For example, Reinvestment Fund found that unlicensed providers in Newark, New Jersey, were responsible for about half of the market—a much higher share than in other markets they’d analyzed, like Atlanta or Philadelphia.
“When we came up with the Newark number, everyone was shocked,” said Bevin Parker-Cerkez, the CDFI’s senior director for childhood education. Before that analysis, Reinvestment Fund was planning an approach to expand the capacity of already-operating licensed providers, she recalled. Instead, “The data showed us that we could meet the needs of the community while building the wealth and the strength in those communities.” Assisting unlicensed providers in becoming licensed would help those providers boost their income and obtain assets.
“Having granular data is very compelling. It helps us report out our results with integrity, which is helpful with any funding source and beneficial to the sector at large.”
—Bevin Parker-Cerkez, Reinvestment Fund
Reinvestment Fund also updates a map annually with data on child care availability. “The child care map showed areas with a substantial gap between supply and demand. In response, we were able to support a center that opened and now serves 200 kids,” Parker-Cerkez said. “It doesn’t end the gap, but it does help. And having granular data is very compelling. It helps us report out our results with integrity, which is helpful with any funding source and beneficial to the sector at large.”
Meanwhile, at First Children’s Finance (FCF), a CDFI with headquarters in Minneapolis and operations in several states, staff spend six months conducting a deep data dive before developing strategies with communities in small towns and cities around Minnesota. The effort, part of FCF’s Rural Child Care Innovation Program, has thus far helped create nearly 1,250 new child care slots across 19 rural communities. FCF’s work on supply and demand in smaller communities has been particularly critical for helping community leaders understand the appropriate scale for solutions. “For example, we might help identify a need for 100 slots,” said Heidi Hagel-Braid, chief program officer for FCF. “An employer can then realize that while they knew they needed 30, they can see how that fits within the broader community needs.”
Analyzing the real estate market
CDFIs’ ECE-related analyses also cover local real estate market conditions, because they influence child care capacity. For example, Parker-Cerkez observed, “Older housing stock can be a barrier, because it’s very expensive to bring it up to code for use as a licensed child care home.” If an area’s “low-hanging fruit” of cheaper, appropriate buildings is already gone, she said, it may be time to pursue more complex deals with housing or commercial developers.
Understanding the real estate assets in a community can lead to innovation. Hagel-Braid noted projects that leverage previously unused buildings in rural Minnesota. FCF’s understanding of child care business models and the regulatory environment allowed it to facilitate a new approach: using the unoccupied buildings as “hubs” that co-locate licensed family child care providers in non-residential settings. The in-home child care providers are able to maintain their own small practices in the hubs, even though they’re not operating out of an actual home. Presenting a complete breakdown on the economic and other benefits of the new approach is crucial to bring initially skeptical providers on board, said Hagel-Braid.
Targeting technical assistance to suit providers’ needs
Once CDFIs understand the market a child care provider faces, they can offer training and technical assistance. These services may help ECE providers run their child care operations more efficiently, which can put them in a better position to find and successfully deploy credit, grants, or other financial products. One challenge in the ECE market is that providers usually don’t have a background in business. Even if providers are well-versed in early childhood development, “there is not a lot of financial or business training available to help run the administrative part of a center,” said Parker-Cerkez. Access to such supports increases ECE providers’ ability to stay open and expand their operating capacity.
CDFIs and their partners target their offerings to particular market segments and adapt to serve ECE providers at different stages in their careers.
CDFIs and their partners target their offerings to particular market segments and adapt to serve ECE providers at different stages in their careers. WomenVenture, a Minneapolis-based CDFI, holds free education sessions for aspiring child care providers to explain different business models.
Clients who move forward can pursue online or in-person training about operating a child care center or a family-based child care business. “Our goal is to deliver training and then connect those child care operators to capital,” said Jeff Andrews, director of program innovation at WomenVenture. The CDFI’s consultants continue to offer technical assistance long after providers start their businesses.
Outreach can help connect providers to CDFIs’ financial products. When Reinvestment Fund started a microloan fund for child care providers, it didn’t see much interest initially. “We realized we needed to do the outreach and provide the education for business owners to understand that this was better than using a credit card,” said Parker-Cerkez. After a year, use of the microloan fund increased to $500,000, lent at 3.5 percent interest.
For providers that are licensed and operating, CDFIs have developed products that support professional development and position successful ECE ventures for expansion.
Multiple CDFIs described technical assistance that either precedes or accompanies a grant or loan. CDFIs offer—or require—consulting services for child care providers, such as business planning, estimating and diversifying revenue sources, and managing operations. With more stable revenue sources and enhanced access to credit, child care providers can think about scaling up their operations. At that stage, CDFIs may help those business owners formalize and streamline their administrative practices and ensure that their management structure and back offices are set up to handle the additional scope while maintaining quality.
CDFIs help child care providers navigate facility acquisition and renovations, too. “Our technical assistance helps providers who are ready to expand understand and navigate the real estate process, and over time function like a traditional small business that’s more ready to take on debt for facilities-related projects,” said Nicole Barcliff, policy director at the New York City headquarters of LISC (Local Initiatives Support Corporation), a CDFI with offices in 32 cities.
Adapting financial tools to serve the ECE sector
CDFIs adapt their financial products to meet the unique needs of child care providers, citing their flexibility as a key consideration. “The more you learn about this sector, the more you learn you can’t just approach it with one perspective or one fix,” said Parker-Cerkez. “Solutions have to hold the system together at large, because it’s tricky and nuanced.”
“The more you learn about this sector, the more you learn you can’t just approach it with one perspective or one fix. Solutions have to hold the system together at large, because it’s tricky and nuanced.”
—Bevin Parker-Cerkez, Reinvestment Fund
A fund managed by Reinvestment Fund offers a good example. Child care providers complete a business plan with consultants, with clear milestones and checklists. Providers following that plan have access to $300,000 in grants for capital improvements. If that isn’t enough to cover the cost of a new or expanded facility, Reinvestment Fund helps facilitate real estate loans or construction loans. Reinvestment Fund may connect business owners with banks, originate the loans itself, or take a subordinate position on other debt.
For many child care providers, much smaller amounts of capital are necessary—which is one reason why traditional lenders are less interested in the child care market, Barcliff said. “Providers have limited ability to take on debt, which makes grants and very long-term, patient capital the most likely products to be useful to providers in our footprint,” she added.
CDFIs can support local child care markets by offering forgivable loans. Banks or employers can fund such programs. According to Hagel-Braid, the amounts can be relatively small. “For licensed family child care providers, a $5,000 forgivable loan is a huge deal,” she said.
Partnering with traditional lenders to support ECE
The participation of traditional lenders in child care tends to be limited. “While banks may have product lines that focus on other community issues, such as affordable housing, they don’t tend to have lines of business focused on child care,” noted Barcliff. CDFIs are addressing this by creating opportunities for traditional banks to participate in the child care sector. Partnering with CDFIs to lend to ECE providers may help banks meet their obligations under the Community Reinvestment Act (CRA),which gives community development consideration to banking activities that serve children from low- and moderate-income (LMI) families, support small businesses, or serve LMI or underserved areas. (For more on the CRA, see our CRA information page.)
CDFIs can facilitate traditional banks’ entry into child care markets in a number of ways. For example, banks can work with a CDFI to participate in a loan where the CDFI takes a subordinate position; that is, the CDFI takes on more risk than the bank, which holds a senior position. Banks can also provide capital through a low-interest loan or investment in a CDFI’s revolving or forgivable loan fund.
A group of community banks located in the Minneapolis-St. Paul area collaborated to help capitalize FCF’s revolving child care loan fund with low-interest-rate loans. A few national banks have also contributed to the loan fund. Since FCF makes loans to several providers that serve a significant share of LMI children and families, banks may note this activity during a CRA examination. FCF also has financial analysis tools that can help traditional lenders better understand ECE businesses and the market.
“We’re not going to beat bigger banks on an interest rate, but our technical assistance will make a borrower more likely to succeed.”
—Heidi Hagel-Braid, First Children's Finance
FCF has also offered its technical assistance services to child care providers working with other lenders. “Financial institutions, including other CDFIs, have asked us to help provide technical assistance to child care providers who are taking out a loan,” said Hagel-Braid. The partnership is a win-win for both parties: the lenders compensate FCF for its expertise, thus providing the CDFI with revenue, and FCF’s technical assistance increases the likelihood that the lender’s client will be able to repay the loan. This can be an ideal situation for those child care providers, too, said Hagel-Braid. “We’re not going to beat bigger banks on an interest rate, but our technical assistance will make a borrower more likely to succeed.”
In Rhode Island, the LISC office manages a fund that has distributed $21.7 million to 500 child care businesses. The fund relies on support from federal, state, and local dollars, with additional capacity added by philanthropists and traditional lenders.
Barcliff noted that the market expertise LISC offers made the cross-sector support possible. “As a CDFI, we’re able to bring financial partners in the private sector to the table because of the specialized skills our ECE team has,” she said. “The fund has been so successful, we use it as a beacon for other public partnership investments.”
Back in the Midwest, FCF’s state-government-supported work in rural communities brings together stakeholders, often including bankers, to develop community-specific child care plans. Aside from making loans or financial contributions, banks can help fill a leadership role in local initiatives to expand the supply and quality of ECE providers. Even if there isn’t an immediate financial role for them to play, Hagel-Braid said, “Just having bankers in the room during meetings about ECE is helpful, because they’re often leaders in their community—when they show up, people will notice.” She added, “Bankers want to be part of a healthy community,” and noted that employers can also be important partners in efforts to grow local child care markets. “They might know how many slots they need,” she said, and CDFIs can provide the data and technical assistance necessary to form a plan for supporting those slots with a diversity of approaches.
CDFI practitioners say that community leaders are increasingly aware of the important role ECE plays in creating a strong current and future workforce. “Child care projects in our market don’t happen in isolation,” said Barcliff. “They tie in to what equitable development looks like in the communities that we serve.”
Positioning providers to succeed
The challenges child care providers face as they make ECE services available to their communities are substantial. But CDFIs are demonstrating innovative approaches to expand the crucial supply of ECE—conducting market analyses, offering effective financing products, layering in training and technical assistance to child care providers, and forging or facilitating partnerships with traditional financial institutions to bolster funding for the ECE sector.
“When we build a system that walks providers through each stage of becoming a small business owner, they are in a position to succeed,” said WomenVenture’s Jeff Andrews. The benefits of such a system accrue not only to child care providers, but also the children and families they serve and society as a whole.