Child Care Infrastructure Revolving Loan Fund
Executive Summary
To help address the inadequate supply of quality child care in Colorado, the Institute of Evidence-based Policymaking prepared a report in January 2025, Reducing Barriers to Providing Child Care in Colorado. The State of Colorado has made efforts in the past several years to address the child care shortage through direct aid to child care providers, technical support, family and employer assistance, workforce training, and wage subsidies for child care workers.
To build on these efforts, the Institute’s report proposed nine policy recommendations to help overcome barriers to owning and operating child care facilities. Two of the report’s recommendations were identified for an initial implementation phase – creating a revolving loan fund and streamlining the child care licensing process.
This document examines in greater detail how the revolving loan fund could be structured and funded. Key findings and recommendations include:
Traditional lending often excludes child care providers, and many providers struggle to secure small business loans.
A revolving loan fund supporting child care entrepreneurs can address these issues by providing low-interest, accessible capital.
Capital funding options for child care providers that are currently available include Community Development Finance Institutes (CDFIs), philanthropy, state, local and federal government grants, government loans, and tax credits.
New funding sources are needed to support the child care industry.
A revolving loan fund would provide an important resource, particularly with current budgetary challenges facing all levels of government.
The target amount for this revolving loan fund is $50 million, which could be allocated over several years, which has the opportunity to create up to 27,000 child care slots in Colorado.
The revolving loan fund would be structured to create the most child care slots.
The State can lend funds to a CDFI at 0-1% interest, allowing the lend to loan funds at a 4 to 5% fixed rate.
To mitigate risk, a few options exist for guaranteeing the loan and protecting from loan defaults, including a loan loss reserve fund that would be funded by private philanthropy.
Due to the differing needs of urban and rural child care providers, we recommend that at least two lenders are selected to focus on the Front Range and rural areas of the state.
An essential component of this initiative is technical assistance.
Overview
Child care centers face significant financial hurdles throughout their life cycle. Many child care centers have closed over the last several years in Colorado due in large measure to the challenges of facility costs and maintenance, licensing, staffing, and compliance with safety regulations.
Traditional lending systems often exclude child care providers. Startup costs can range from $50,000 to $5,000,000. But providers struggle to secure small business loans due to narrow profit margins, fluctuating enrollment, and limited collateral. As pandemic-era subsidies expire, numerous centers, especially small and family‑based operations, face renewed financial strain.
A revolving loan fund targeting child care entrepreneurs can help address these issues. By providing low-interest, accessible capital, such a fund would help launch and sustain new facilities, stabilize the sector, and close the critical gap in care availability across Colorado.
The timing of this loan fund is critical. Pandemic-era stimulus funds have been spent, and the state’s fiscal situation no longer allows for large-scale grant programs. Interest rates through traditional lenders remain elevated due to the lingering impacts of high inflation. And nonprofit organizations in Colorado are working towards a large-scale funding solution to help sustain child care subsidies in the state.
Creating additional child care spots across the state at varying price points can support families with young children who wish to rejoin the workforce. Colorado’s recurring workforce shortage across different sectors has coincided with lagging labor force participation by women with children under six years old. Up to an estimated 20,000 mothers with young children could re-enter the labor force with adequate child care support, earning roughly $1.2 billion in wages per year. [*]
Cost to Open a Child Care Facility
The start-up capital needed to open a child care facility varies significantly. Factors that contribute to this variation include location, size, and the degree to which an existing structure needs to be retrofitted to meet state and local regulations. Provider preference and target market will result in variations, and some providers may opt for higher-end finishes and equipment.
A home-based child care provider will have lower start-up costs. These costs vary based on whether the home requires updates or add-ons to comply with state and local regulations, and if the provider needs to purchase additional equipment and supplies. Start-up costs could range between $5,000 and $50,000 for a home-based provider who can care for up to six children with no additional staff.
Center-based child care is more expensive to start. State-of-the-art centers can cost as much as $1,000 per square foot for a ground-up facility. Similar to home-based child care, costs vary due to size, finishes, location, and the existing structure. Retrofitting an existing structure to comply with regulations can run $200 to $700 per square foot. The information provided in this report is based on examples from existing facilities in Colorado and the Child Care Facility Needs Assessment conducted by the Colorado Department of Early Childhood and Department of Local Affairs. [LINK]
Capital Options for Child Care Providers in Colorado
Various sources of capital exist for child care providers; however, it is often difficult for small, start-up providers to access the more traditional types of funding. Adding to this challenge is the declining federal, state, and local government revenue and funding. More than
$700 million was allocated to the Colorado Department of Early Childhood primarily in the form of grants to industry providers over the past several years, but currently no funding opportunities are available through the Department. [LINK]
The following options are the primary sources of capital funding for child care currently available beyond traditional lenders.
1. Community Development Finance Institutions (CDFIs)
Colorado Enterprise Fund
CEDS Finance
Rocky Mountain Microfinance Institute
First Southwest Bank
2. Philanthropic Funding
Buell Foundation
Gary Community Ventures
Mile High United Way
Merage Foundation
Boettcher Foundation
Daniels Fund
Denver Foundation
Colorado Gives Foundation: Early Care and Education Grant for Jefferson County
3. Government Grants
Federal: Child Care and Development Block Grant
Federal: Head Start Grants
State: Colorado Department of Early Childhood: no grant opportunities on their website currently
Local: Early Childhood Council Leadership Alliance
Early Childhood Coach Credential Scholarship
TEACH Early Childhood Colorado
TEACH Colorado
4. Government Loans
Federal: SBA loans 7(a) and 504
Federal: USDA Community Facilities Direct Loan and Grant Program
State: OEDIT Colorado Startup Loan Fund
State: Energize Colorado Loan Program
5. Tax Credits
State: Child Care Contribution Tax Credit
State: Child Care Center Property Tax Exemption
[*] According to American Community Survey data from the U.S. Census Bureau, in 2023, 73.1% of women with children under six were in the labor force, while their counterparts with their youngest child over six was 82.0%. The difference between the two is over 20,000 that could potentially re-enter the labor force. If half of those women work full time and half work part time earning the average wage in Colorado, they would earn roughly $1.2 billion in wages per year and pay up to $56 million in income taxes to the state.
State-Funded Child Care Infrastructure Revolving Loan Program
The State of Colorado, in partnership with private and nonprofit organizations, can help to close the gap in access to capital for child care providers. Pandemic-era federal funds provided almost $30 million to the Colorado Department of Early Childhood (CDEC) for an Emerging and Expanding Grant Program, with a goal of creating additional child care capacity in the state. As these federal dollars have been spent down, new funding sources are required to continue to support the child care industry. A revolving loan fund would provide a responsible fiscal solution given current budgetary challenges facing all levels of government.
Loan Amount and Impact
The target amount for a revolving loan fund is $50 million, which could be allocated in tranches over several years, e.g., $10 million per year for five years. This level of funding could potentially create up to 27,000 child care slots in Colorado. This is based on the estimates from the Colorado Department of Early Childhood, which reported that 5,459 slots were created from the initial $10 million allocated through the Emerging and Expanding Grant program.[LINK] The total amount allocated to the revolving loan fund can vary based on fund availability, but the number of slots created will increase or decrease accordingly.
State Funding Options
With current budgetary constraints, few state funding sources are available for this proposal without increasing taxes or fees or diverting resources from other state programs. Below are outlined funding options:
1. Unclaimed Property Trust Fund
This fund is managed by the State Treasurer, and the assets that comprise the fund are held in trust. The project total balance of the fund for Fiscal Year 2024-25 is $1.4 billion. The fund collected over $500 million during fiscal years 2022-23 and 2023-24, and it is projected to collect $229 million each year over the next three years. Claims paid out are approximately $53 million per year, creating an annual net increase of $145 to $245 million in the total amount of the fund.
The Unclaimed Property Trust Fund earns over $30 million in interest each year. A total of $90 million in interest over the next five fiscal years has been leveraged by Senate Bill 25-290 in the form of a zero-interest revolving loan fund for health care providers that serve low-income, uninsured people in the state. This bill defines the use of the Unclaimed Property Trust Fund as an interfund loan, which does not count as revenue and as such is not subject to the revenue and state spending limit provisions of the Taxpayer’s Bill of Rights (TABOR), according to section 24-77-102 (17) and 24-77-103.6 (6)(c), C.R.S.
As the interest revenue is partially leveraged for the aforementioned legislation, the principle of the fund can be used to create a revolving loan fund to help create more child care slots in Colorado. Allocating $50 million for a child care revolving loan fund would use 3.5% of the project FY 2024-25 total Unclaimed Property Trust Fund balance for one year. The $50 million could be allocated in five tranches over five years, thus using 0.7% of the total fund balance each year for five years.
2. FAMLI Fund
The Family and Medical Leave Implementation (FAMLI) program became law in 2019 and began collecting revenue in 2023. The program was created to enable workers to take temporary leave from their job to care for themselves or their family members under certain circumstances. A fee is levied on workers and employers as a percentage of their wages or salaries to help fund extended leave while receiving a portion of their pay.
In calendar year 2024, the FAMLI fund paid $685 million in claims while collecting over $1 billion in payments. The fund is projected to collect $1.47 billion in fiscal year 2025-26 after the adjustment for the provisions of Senate Bill 25-144. Year-to-date claims paid totaled $343 million through June 13, 2025, roughly on pace with last year’s claims.
The FAMLI fund presents a few funding options for expanding child care capacity:
Building off Senate Bill 25-144, allocate 0.02% of the premium to child care infrastructure. This would reduce the FAMLI premium for its initial purpose to 0.86% from its current reduced amount of 0.88%. Based on the bill’s fiscal note, this would generate an estimated $35 million in fiscal year 2026-27 and similar amounts thereafter. This option would not require the use of private funds to guarantee loans.
The Department of Labor and Employment in conjunction with the State Treasury could also invest the funds in high-yield investments and spend the interest earned on child care infrastructure either as grants or loans, although grants would likely be subject to TABOR.
Establish a revolving loan fund using the excess revenue in the FAMLI fund to address the care giving needs of Colorado workers. Since the funds would be repaid, this would not be subject to TABOR. The funds could be loaned out at a 0-1% interest rate.
Loan Structure
To ensure the sustainability of the revolving loan program, the loan fund should be structured to create the most child care slots with the highest return on investment. Defining target populations to receive loans, providing below-market interest rates, setting delayed repayment terms, establishing a privately funded loan loss reserve fund, and requiring technical assistance can all help in sustaining the program and mitigating risk. The Department of Early Childhood should hire a program manager to help set the eligibility parameters; however, due to the technical nature of issuing loans, a Community Development Finance Institute (CDFI) should manage the loan program.
Similar Programs
To facilitate the administrative start up time needed to run this program, the revolving loan fund could be structured similar to the Emerging and Expanding Grant program administered by the Colorado Department of Early Childhood, which had a similar goal of creating new child care slots in the state. The business rules for the program provide the parameters for the providers eligible to apply for grant funding. This includes the following funding ranges based on provider type:
Due to the significant costs to build, renovate, and maintain child care facilities and the lack of current grant funding, the upper bound of these loan amounts could be doubled to make up for the dearth of other types of funding available.
The eligible uses of the funds include capital improvements, learning/classroom materials, professional development, and coaching. According to the department, many child care providers who received grants funding had some difficulty staffing up for the newly created child care slots. In addition to the budget and documentation submission requirements, more emphasis could be put not only on marketing plans but staffing plans, to ensure the spots that are created are utilized.
From the first tranche of funds, 262 eligible programs received just over $10 million in funding, an average of $38,757 per provider. The total child care capacity of providers receiving funds increased from 7,351 to 12,990 in 23 months (from January 2021 to November 2022), an increase of 5,459. This is an average increase of 21 openings per provider, and, on average, $1,860 needed to be spent in order to increase capacity by one opening. If the same amount is needed to create one new child care opening, a $50 million investment could create almost 27,000 new child care slots.
The Colorado Department of Agriculture rolled out the Colorado Agricultural Future Loan program, a revolving loan fund targeting beginning farmers, ranchers, or agricultural producers that cannot access traditional forms of capital. An initial investment of $30 million in pandemic-era stimulus funds seeded the capital, which was loaned to its lending partner, First Southwest Bank, at 0% interest. Revolving loans of up to $750,000 that can be drawn upon for up to five years with a 4% fixed interest rate and a term of up to 20 years are provided to build diversity and resilience in Colorado’s agricultural sector. The Department and program staff have valuable experience and lessons learned that can be shared to help smooth the initial administration of the child care loan program.
Defining the Target Recipients
To ensure that resources are allocated to the people and places most in need, targets could be set to distribute the funds accordingly. The following factors could be considered:
Current and future child care deserts,
Informal child care providers that want to become licensed,
Quality improvement,
Deferred maintenance costs,
Larger loans to established and proven providers that want to expand,
Smaller loans to home-based and smaller providers,
A diversified capital stack for larger loans, and
Adequate staffing plans for new or expanding programs.
Creating a diversified pool of borrowers can help meet the diverse needs that exist across the state and ensure the funds stretch further to create the most sustainable child care slots.
Interest Rates
Interest rates for traditional bank lending and Small Business Administration loans carry interest rates that may make borrowing funds untenable for child care providers. The current prime interest rate is 7.5%, meaning this will be a floor for most business loans. The Small Business Administration loans have a base rate of 7.5% (the prime rate) and an additional rate based on the loan amount, as shown in the table below. Rates can be fixed or variable depending on the lender and whether the borrower has collateral to secure the loan.
In order for child care providers to have access to lower-cost capital, the state can lend funds to a CDFI at 0% to 1% interest, allowing the lender to loan funds at around a 4% to 5% fixed rate.
Risk Mitigation/Loan Guarantees
Fixed rates are often paired with collateral requirements, which many child care providers may not be able to provide. This would leave lenders open to greater risk, borrowers facing higher interest rates, and the state’s capital subject to loss. To mitigate this risk, there are a few options for guaranteeing the loans and ensuring that if and when a loan is defaulted on, the state will not bear the loss. While there is significant demand for child care in the state, the margins are extremely thin, with many providers barely breaking even, and providers have little collateral through their businesses to help secure a loan.
Loan Loss Reserve Fund: Loan loss reserve funds serve to protect the initial capital investment or lenders from non-performing loans or defaults. For the losses to not impact the state’s investment, a reserve can be created with private funds to offset any losses that cannot be covered through other means. Similar reserves often hold 2-4% of the total investment in reserve, a 10% reserve is recommended for this loan fund due to the lack of collateral and thin profit margins. Philanthropic organizations in the state are engaged in this idea to provide the $5 million needed for the 10% fund. These private dollars would be highly leveraged with public funding.
Cash Collateral Support: This is a program funded through the Colorado Office of Economic Development and International Trade (OEDIT) and administered by the Colorado Housing and Finance Authority (CHFA) that provides a credit enhancement to lenders to issue loans to small- and medium-sized businesses that may not otherwise qualify due to a lack of collateral. The state provides 25% of the loan amount up to $500,000 for loans of up to $10 million. Businesses that are employee owned get a larger benefit of up to 40% or $800,000. This program can be leveraged in lieu of the loan loss reserve.
Colorado Credit Reserve: This program is very similar to the Cash Collateral Support program, as it is funded through OEDIT, run by CHFA, and targets businesses that struggle to access traditional loans. In contrast, the program is funded through the borrower paying 1% of the loan principal into a loan loss reserve, which is matched by the state. Priority is given to women- and minority-owned businesses, businesses in enterprise zones, and rural businesses.
Lending Partners
There are other lenders and nonprofit organizations in the state that currently provide guarantees on loans to child care providers or are providing low-cost loans at a smaller scale that this program proposes. CDFIs such as the Colorado Enterprise Fund, First Southwest Bank, and CEDS Finance have all provided these loans, but typically at higher interest rates if there is no guarantee or loan loss reserve fund to help offset the risk. Due to the varying nature and needs of urban and rural providers, as well as different funding source potential such as U.S. Department of Agriculture loans, it is recommended that at least two lenders are selected to focus on the Front Range and rural areas of the state. Both the Colorado Enterprise Fund and First Southwest Bank have expressed interest in this proposal, since they both have made serving the child care industry a strategic goal.
Technical Assistance Requirement
When providing start-up loan funds to child care providers, technical assistance is essential to ensure successful outcomes. Many prospective providers have expertise in early childhood education but may lack experience in business planning, licensing compliance, budgeting, or navigating zoning and facility requirements. Without targeted support, they may struggle to meet regulatory standards or manage the financial and operational complexities of opening a new facility. Technical assistance helps bridge this gap by offering guidance on writing business plans, forecasting enrollment and revenue, preparing loan applications, and implementing sound financial practices. Supporting providers in this way reduces the risk of loan default, increases the sustainability of child care businesses, and ultimately strengthens the supply of high-quality care options for families. A variety of technical assistance resources are available to child care providers currently through the Colorado Department of Early Childhood, local Early Learning Councils, nonprofit organizations such as Early Learning Ventures, and Small Business Development Centers. Business technical assistance is crucial for this program to be successful.
Impact
This initiative should have a highly significant impact on increasing child care capacity. An investment of $50 million in loan capital could result in up to 27,000 new child care spots, based on estimates from the Colorado Department of Early Childhood’s Emerging & Expanding Grant Program.[**]
[**] $10 million was issued in state Fiscal Year 2021-22 for the Emerging and Expanding Grant Program, and 5,459 new child care slots were created across 37 counties. https://cdec.colorado.gov/emerging-and-expanding-grants
Next Steps for Research: Improving the Child Care Licensing Process
Colorado is experiencing a significant shortage of accessible child care, exacerbated by a complex and time-consuming licensing process. Delays and uncertainty often surround the timeline for approval that slows the process of getting new child care slots available to meet the needs of Coloradans. To address these challenges, the child care licensing process needs to be streamlined by reviewing regulations and business practices and adopting best practices from other states, including evaluating a risk-based licensing system.
Based on industry input, the licensing process to start a child care facility is a point of concern and frustration, and at times, cost overruns. Streamlining the licensing process can help providers get up and running faster and with fewer uncertainties. This will include:
Assessing licensing regulations with a focus on maintaining safety without overburdening providers
Evaluating risk-based licensing and regulation systems for use in Colorado,
Ensuring access to clear information about licensing expectations
Working with licensing specialists to ensure consistent application of licensing rules across the state and to build a culture of trust
Coordinating with local governments to streamline the process for centers from start to finish
Conclusion
The demand for child care in Colorado is not abating, but the access to funding has. Creating a revolving loan fund for child care providers to start a new business or expand their existing business is one critical element of ensuring a continued supply of child care in the state. Other important elements include Child Care Assistance Program funding, workforce development programs, and training and technical assistance for providers.
Providing low-cost access to capital through a loan program can help bridge the gap in child care capacity. Building on the success of the Emerging and Expanding grant program, this loan program could create thousands of new child care openings across the state while posing little risk to the state investment through a privately funded loan loss reserve fund. These policy recommendations provide foundational ideas for how to target the loans but leave the ultimate determination of those needs to the Colorado Department of Early Childhood.