Sources of Funeral Home Financing

Sources of Funeral Home Financing

Funeral home lending is a specialty market. Fewer banks cover the funeral home industry than other small-business markets. This has been true for the funeral industry for many years. This means other sources of funeral home financing must be found.

In response to the limited financing available to the funeral industry, some very ambitious lenders have attempted to enter the market. These lenders offer aggressive terms that put stress on the cash flow of the business. Over time, the business owner has difficulty paying down the debt. Lenders that charge aggressive interest rates and fees know this. Their main goal is to charge heavy closing fees and collect as much interest as possible until you can refinance your debt with a traditional or direct lender.
The right loan can be the difference between success and failure in the funeral home business. The following will examine some of the borrowing options available to funeral home buyers and owners

Seller-based financing

Funeral home financing has traditionally been done via a seller-held note for the business and a local lender holding a note for the real estate. This structure can be good for the buyer but often requires the seller to hold a very large portion of the overall debt. Holding this debt means the seller still carries a lot of the risk of the success of the business. Consequently, the seller must continue to supervise the business until the seller note is paid off.

Direct lenders

Baby boomers are starting to retire and generally they want to cash out of their business without having to hold 40% to 60% of the borrower’s debt load. Specialty lenders have come to the table and offer financing that allows the seller to cash out and hold very little transaction debt.
This structure puts a large portion of the risk on the specialty lender. In turn, they demand higher fees and interest rates for taking on that risk.
Direct lenders include specialty lenders, traditional banks and non-bank lenders. Direct lenders originate and underwrite their own loans and either hold their loans in-house or sell off part of their loans to investors or other banks.

Direct lenders are the safest route to go when seeking financing for a funeral home acquisition or a funeral home refinancing. Direct lenders do not normally charge up-front fees for reviewing a transaction. Direct lenders do not require you to sign a financing agreement with them to pursue a loan. Direct lenders may charge an application fee for submitting your loan for approval and they may ask you for a good-faith deposit once the loan is approved to cover any out of pocket expenses for third party reports such as a business appraisal, commercial real estate appraisal and an environmental inspection of the commercial property. Typically, the monies you pay into a direct lender during the approval process will go directly toward your down payment when the loan closes. Please verify this fact when dealing with any lender.

Dealing directly with the bank will save you time and money, but dealing with banks can be difficult if you don’t know the lending process and the information a bank needs to make a credit decision.
Banks need to prove that your business can service the debt you are requesting. To prove your debt service, the bank will need to see a current picture or snapshot of your business and personal income and expenses. This means the bank will need your historical federal tax returns and your current financial statements. They need to see a current picture of your existing business and personal debt.
The keyword here is “current.” Your tax returns and financials must be filed and current. If you are behind on filing your taxes, a bank will not have the information they need to make a credit decision.
Being prepared is key. It shows the bank that you have attention to detail and an understanding of the financial aspects of business. Your banker will be much more confident in your abilities if you are prepared financially.

Non-direct lenders

The limited availability of financing for the funeral industry has led to an increased number of non-direct lenders and intermediaries advertising on the internet. These non-direct lenders and intermediaries are not lenders and do not underwrite and fund their own loans. Their role is to originate loans that they then take to direct lenders for funding. Remember, if you need a loan and don’t know where or how to look for a direct lender, an intermediary may be able to locate a direct lender for you.
Whenever you are seeking financing on the internet be aware of the difference between a direct lender and a lender that may only be acting as an intermediary. Make sure you ask the question, “Are you a direct lender?” Not knowing the difference could cost you a significant amount of money in loan fees.
Be wary of any lender or intermediary asking you for up-front fees to begin working on your loan. Be wary of any lender or intermediary asking you to sign a financing agreement prior to beginning work on your loan. Direct lenders will not ask you for up-front fees or a financing agreement to review your loan and they can quickly gather the required information to assess their interest level in pursuing your loan.

In this confusing market it’s easy to see why borrowers want to be well-educated about obtaining a loan and often seek the services of a  reputable intermediary.

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