Can You Get an SBA Loan for a Funeral Home?
Funeral homes employ over 100,000 people throughout the United States and generate billions of dollars in revenue. It is critical to the health of the economy that these vital businesses have access to financing that will help them open and continue operations. Small Business Administration loans, also known as SBA loans, are an excellent option for individuals looking for financing in the funeral home industry.
What is an SBA Loan?
SBA loans are one of the best options available for small-business funding. SBA loans are not issued by the SBA itself, but are partially guaranteed by this federal agency, making the risk for lenders much lower than traditional loans. (1) The SBA works with a vast network of approved lenders that frequently lend to small businesses and offer better loan rates than other loan options.
Essentially, if a business owner cannot pay back their loan, the lender will be able to recover most of their debt from the SBA. The SBA guarantees up to 85% of a loan, which encourages lenders to work with small businesses that would otherwise be seen as a risky investment.
Types of SBA Loans
There are several types of SBA loans for business owners, depending on their needs. Funeral home business owners may be able to receive one of the several SBA 7(a) loans, a Microloan, an SBA disaster relief loan, or an SBA 504 loan. Each funeral home will have different needs, so it is important to understand each loan option before choosing.
Here is a summary of several of the loans available:
- Standard 7(a) Loan. The standard SBA 7(a) loan is the SBA’s most popular loan option. It offers borrowers up to $5 million in funds. The SBA guarantees 85% of loans under $150,000 and 75% of loans over $150,000. Eligibility is determined by the SBA and there is a maximum amount of interest the lender is allowed to charge.
- 7(a) Small Loan. Through the 7(a) small loan, the SBA works with lenders to offer up to $350,000 in funds. This loan is nearly identical to the standard 7(a) loan, with the main difference being the interest rate. The maximum interest that a lender can charge on a 7(a) small loan is much higher than on a standard 7(a) loan.
- SBA Express. The SBA Express loan is an excellent option for funeral home owners who need access to funds faster than the typical amount of time it takes to be approved for a standard 7(a) loan. In exchange for the faster turnaround, the SBA only guarantees 50% of this loan. Typically, interest rates are much higher and the eligibility decision is made by the lender rather than the SBA. The maximum amount of funds available through this loan is $350,000.
- SBA 504. SBA 504 loans are an excellent option for funeral home owners who want to expand their business by purchasing new real estate, expanding on existing real estate, or purchasing an existing funeral home. SBA 504 loans work differently than the 7(a) and SBA Express loan because these are long-term loans with a fixed rate that are meant to be paid off over decades, rather than in 10 years or fewer.
- Microloans. Microloans are an option for funeral home owners who need less than $50,000 for their business. These loans are often used to start new businesses, to purchase inventory or equipment, and as working capital.
Whereas most of the loans available through the SBA are funded through banks and credit unions, microloans are processed through community-based non-profit agencies. Because of this, these loans are most often granted to new startups and businesses run by veterans, women, or minorities.
Business owners who apply for microloans must have good credit and a good, proven business plan. This is because the money is provided to the nonprofit lender by the SBA at a highly discounted rate. The SBA is much less involved in the approval and processing of these loan applications, and lenders are allowed to be much more selective about who they approve.
SBA Disaster Loans. SBA disaster loans are meant to assist small businesses affected by major natural disasters or other unforeseen events. These low-interest loans are meant for businesses that are not in the agricultural industry and are not limited to small businesses. Funeral home owners can apply for up to $2 million to repair or replace real estate, machinery, equipment, personal property and business assets.
- SBA Disaster Loans.SBA disaster loans are meant to assist small businesses affected by major natural disasters or other unforeseen events. These low-interest loans are meant for businesses that are not in the agricultural industry and are not limited to small businesses. Funeral home owners can apply for up to $2 million to repair or replace real estate, machinery, equipment, personal property and business assets.
To be eligible for a disaster relief loan, the funeral home must be located within an SBA-designated disaster area. The SBA keeps an active list of disaster areas for individuals and small business owners to review before applying. (2) This loan is different from those being offered as a response to the Covid-19 pandemic.
SBA Loan Terms
The interest rates for SBA loans change depending on the terms of the loan. For example, as of March 2020, SBA 7(a) loans under $25,000 that are paid back in under 7 years have a maximum interest rate of 7.5%. If the loan is paid back in over 7 years, the interest rate goes up to 8%.
The terms of an SBA loan are determined by how the borrower intends to use the funds. Loans used for working capital will need to be repaid within seven years, while loans used for new equipment will need to be repaid within 10 years. Borrowers have up to 25 years to repay SBA 504 loans used for real estate purchases.
Can You Get an SBA Loan for a Funeral Home?
The SBA details several businesses that are ineligible for SBA loans, but funeral homes are not on that list. Funeral homes are eligible to receive SBA loans if they meet all the SBA’s requirements and fill out the necessary forms. (3)
How Difficult is it to be Approved for an SBA Loan?
Like with many government interactions, bureaucracy can make applying for an SBA loan difficult. The SBA has several guidelines for determining a business’s eligibility and will request a hefty stack of paperwork to make their determination.
Those looking for funeral home financing through an SBA loan will need to provide documentation that includes personal tax returns and financial statements for the previous three years, a business certificate or license, their business lease, their loan application history, the SBA’s borrower information form, and a statement of personal history. Even after all of that paperwork, the SBA is likely to request more information before approving an application.
How Long Does the SBA Loan Process Take?
Applying for an SBA loan is notoriously time-consuming. Even the express loans can take several weeks to be approved due to the amount of information requested. Funeral home owners who are experiencing financial stress and need funds immediately should not apply for an SBA loan.
Do SBA Loans Need to be Paid Back?
The SBA guarantees a large portion of each loan that is approved, but that does not mean that the borrower is off the hook. In fact, with the exception of loans under $25,000, the SBA requires the lender to collect collateral that is equal to the amount of money that is being borrowed.
If the borrower does not have enough collateral to secure the loan in full, then the lender is allowed to use personal real estate and investments as collateral. The lender can also accept certain business assets as collateral, such as 10% of the business’s book value at the time of the application.
Like with any other loan, if the loan enters default, standard collection actions will be taken by the lender and the lender will receive the amount of money that was guaranteed by the SBA. (4) At this point, the lender can seize the collateral used in the loan process and have debt collection representatives call borrowers to attempt to collect the debt. Laws restricting when debt collection representatives can contact a person do not apply to business loans, so the borrower can expect to receive phone calls at any time.
Contact BSF Today to Learn About Funeral Home Financing Options
Generally, the SBA will not lend to a business that has not exhausted all other loan options first. The SBA is an excellent asset, but one that is meant to be used as a final stop for financial assistance. However, if a business meets all the stringent requirements set forth by the SBA, then SBA loans are one of the best and least expensive loan options available.
Funeral homes are an essential business that everyone will require at some point in their lives. The Small Business Administration offers several loan options that can help both new and existing funeral home businesses thrive and expand. Though the process can seem intimidating, it is worth the effort for businesses to work with SBA approved lenders. Individuals interested in funeral home loans should speak with a banker that specializes in funeral home financing.
If you’d like to know more about funeral home financing options, contact the experienced team at BSF today.
- U.S. Small Business Administration
- U.S. Small Business Administration