Care home finance

Like most advanced economies, the US has an ageing population, with more than 56 million people beyond the age of 65.

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As people get older, they need more assistance to carry out basic activities, and many require the kind of full-time attention that only a care home can provide. This potent mix of ageing citizens and booming demand has seen the US care home industry mushroom, with revenues reaching $184 billion in 2022. 

Clearly, buying a care home or expanding an existing care facility can make good financial sense. However, instead of using cash, care home finance and mortgages are the best way to fund business growth. Read on to find out more and discover how to fund your care home without piling strain on cashflow.

What is a care home mortgage?

A care home mortgage is a commercial mortgage used to buy, develop, or refinance a care home. This may mean buying an existing care home, starting from scratch with a new property, expanding an existing facility, or extracting equity for liquid cash.

Care home mortgages function like residential mortgages, where a lender provides a percentage of the purchase price based on LTV (loan-to-value, a comparison of the size of the loan to the value of the property), and the borrower repays the loan in instalments, as either capital + interest, or interest only and a lump sum capital repayment at the end of the loan term – which can be anywhere from 1 – 25 years. However, most other factors of a care home mortgage are unlike the standard residential loan:

  • The lender may provide 90% LTV, but typically, it will be 80% or less.
  • Interest rates and fees are agreed on a case-by-case basis. There is no ‘one size fits all’ and commercial mortgage rates are usually higher than residential home loans.
  • This is a business mortgage, so lenders pay attention to the borrower’s business record, relevant industry experience, and general care market conditions.
  • The borrower’s business plan is a core part of the application process. Lenders must see that the care home will be well managed and that loan repayments will not constrain the business.

When to finance a care home

Even in a period of rising interest rates, financing your care home acquisition or expansion can be the best decision. Spreading costs over time allows inflation to shrink the impact of instalment repayments and you can use your capital for other short-term opportunities or to create a ‘rainy day’ fund for unexpected emergencies. (As seen with the recent COVID-19 pandemic).

Additionally, although they are generally very profitable, care homes are labour-intensive businesses, often with high overhead to care for large numbers of elderly residents, can result in erratic cashflow. It therefore makes little sense to constrain working capital by paying cash to start or expand your care home business. 

Lastly, financing an acquisition may allow you to buy a bigger care home with higher occupancy rates (a key indicator of profitability), than you could buy using cash. Even though bigger homes with high numbers of occupants will cost more to buy, in the long run, they may be more profitable and less prone to hiccups in the US long-term care market.

What types of finance can I get for a care home?

Buying a care home is not the only time that owners and investors may need finance to support their business. Buying expensive equipment or vehicles, developing and extending existing premises, covering cashflow dips or paying tax – they may all require financial support. Fortunately, just like any other business, there are a range of other loans available for care homes. They include:

A long-term loan used to buy or start a care home. Borrow up to 90% of the purchase price, with the property providing security for the loan. Pay  the loan back over 1 – 25 years.

  • Development loan:

Use this type of finance to pay for new construction or re-development of existing care homes. Pay for extensions, car parking space, retrofitting, refurbishment, etc.

A form of lease that can pay for vehicles (like a mini-bus) and new equipment. Use the purchased item while you pay for it. The asset acts as security for the loan.

Short-term borrowing to plug the dips in cashflow. Suitable for almost any day-to-day expense. Pay for supplies and services, distribution costs, maintenance expenditures and more. May be obtained with or without security.

  • Revolving line of credit:

Functions like a bank overdraft. Dip into the available cash pool as and when you need it. Pay back what you borrow as customer payments come in.

  • VAT loans:

Avoid tax penalties through late payment of your bill. Short term loans to help you spread the cost over more than a quarter.

Do I need experience in care to get a care home mortgage or finance?

Not necessarily, but it helps. 

First-time care home operators may successfully obtain finance or a commercial mortgage to buy their care home, but the borrower’s industry experience is often a key consideration in the lender’s decision. They must be confident that the applicant has sufficient experience in the care sector to ensure the home will be well managed. 

This means that as well as providing the usual business plan, references, and financial data, first-timers must also prove their ability to run a care home  – usually with relevant industry experience as a care manager or similar role (Registered care home managers must be of good character, be mentally and physically capable of performing the role and have the necessary skills, qualifications and experience. What constitutes ‘necessary’ skills, qualifications and experience for a registered manager varies from case to case and depends on the nature of the care provision).

How to get care home finance or a care home mortgage

As with any loan application, preparation is key. Having all your ducks in a row reduces delay and improves your chances of success:

Step 1: Gather your documentation

Each lender will have different criteria and that may affect the documentation they request. However, most care home finance applications will require:

  • The last 2 – 3 years accounts and income statements for the business, including balance sheet showing current debt and assets.
  • Business and/or personal bank statements covering the past 3 months.
  • Proof of address and identity
  • Business plan
  • Lease or tenancy agreement for your business premises
  • Possibly an accountants’ projection and cashflow forecast.
  • Agreement with local authority.
  • Occupancy levels and income per care home resident.

The lender will also conduct standard credit and security checks. 

Top tip: Check your personal and business credit scores before you apply. Errors on your report could impact limit your ability to secure the loan you need.

Step 2: Prepare your proof of industry experience

  • History of care home (or similar, such as a child nursery) experience.
  • List of any industry awards or commendations.
  • Industry references.

Step 3: Prepare your business plan and presentation

Your business plan and presentation are a central element of your care home mortgage application. Lenders are looking for borrowers who can deliver a successful business outcome. Your cashflow forecasts, budget management plan, staff management plan, marketing plan, care quality mandate, and long-term growth or exit plan are key to securing the loan you need. Where you lack experience or skills to fulfil these objectives, your business plan must reveal how and who you will recruit to support you. In areas where your skills are not strong, such as financial forecasting and projections, it is worth investing in professional assistance to build the information sets you need.

Step 4: Get matched with funding

Just as no two care homes are the same, so no two care home mortgages are the same. The type of care facility you are buying, its location, its revenue streams, its levels of existing debt and its cashflow will help to determine the type of loan you need. Matching your requirement to the right loan is critical. It therefore pays to consider all the options before settling on an offer. 

How do I find the best funding option?

Care home finance and mortgages are a niche area, with different rules of application. Borrowers seeking these types of loan may find themselves forever searching and making applications to lender after lender. The delays this can create could cause you to lose the care business you wish to buy. Instead, working with a broker, who can access care home finance and mortgages from a wide range of lenders is a better way to go. No more cold calls and endless demands for information. Simply tell us what you need and leave the rest to us.

Get started with Swoop

Don’t go round the houses looking for the right deal. Find the best rates, the best terms and the best care home finance or mortgages all in one place. Contact Swoop today.

Testimonials

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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