How to get financing
for a funeral or cemetery project
It's not as easy as "A, B, C" but it is possible to get a loan to help you make that expansion, remodeling or other project a reality. As with anything involving numbers, you need to do your homework.
Puzzled by bank consolidations and changes in the lending environment? Wondering why getting a loan approved seems so difficult today despite the fact that just a couple years ago financing was readily available?
The reasons are many, but when lenders are unable to balance their loan portfolio (i.e., their assets) with the deposits and capital sections of their balance sheets, it doesn't matter how strong your loan application is, you are not going to get financing. Additionally, many banks are now caught up in mergers and reorganizations (downsizing). FDIC examinations, new government oversight/regulations, loan losses (which reduce capital) and new credit restrictions.
What's the best way to ensure success in establishing and maintaining relationships with lenders who won't derail your loan objectives? By carefully selecting lenders who have demonstrated an understanding of your business and who have recently approved and closed loans similar to the one you are seeking.
The first step
In order to be in a position to find the right lender for your financing needs, you must first become familiar with the current lending parameters that make sense in today's economy.
If you are seeking a construction loan, are relatively new to the death care management industry or are expanding beyond your historical geographic or operating environment, the chances are excellent that lenders will be talking to you about one of the government-assisted (the 504 program) or guaranteed (7a) loan programs offered through the U.S. Small Business Administration.
These program provide financial enhancements to lenders to make loans for start-up businesses, expansions, refinancings and acquisitions or for industries where the risks associated with the particular industry may not be acceptable to a traditional community bank lender.
The criteria for eligibility under these programs are ideally suited to the funeral service profession, so when you are evaluating financing alternatives, include SBA financing options.
To properly evaluate whether a particular lender will be a good fit for your needs and to make sure the bank can consider your request in a timely manner, be prepared to present a brief business plan to the lender containing the following prequalification information:
- Describe your business (new or existing) and the market area, including present and proposed competition and the neighborhood/community demographics.
- Discuss present revenue breakdown and anticipate future revenues and trends. For example, if you are a funeral home owner, identify revenues from direct cremation, cremation with service, merchandise sales, traditional service with burial, etc.
- Provide a detailed list of how you would use the loan funds, including refinancing of existing loans, any renovation work you are planning, working capital needs, purchase price details (if you are buying/expanding), etc.
- Describe who is in the ownership group. Include:
- detailed (autobiography-type) resumes
- personal financial statements on all borrowers
- three years of federal tax returns for each borrower and for each outside business that might be considered controlled by each partner
- credit reports (obtain online)
- a description of exactly who is currently managing the business and, if appropriate, who will be managing the new business.
- Include historical federal tax returns for three years and year-to-date financial statements on the existing business and on any business you plan to purchase with the loan.
- Include a debt schedule. Include a list of all loans you have on your business, indicating original loan amount, current balance, monthly payment amount, original use of proceeds and the date when each loan will be paid in full or the date the loan balloons, if applicable.
The foregoing information will enable a lender to quickly determine your qualification for available financing and significantly shorten the time between the initial indication of interest and a decision to move forward.
Tips for selecting a lender
Now that you have a prequalification package of information ready for a lender to look over, where do you start in determining the best alternative for getting your project financed in the shortest time frame with the least amount of aggravation?
In interviewing prospective lenders:
Ask about their funeral service credit policy. First, do they have one? If not, it's likely that your loan will be put into the category of "just like other real estate loans we finance," which might impact your ability to receive a timely or favorable response to your loan request.
Ask whether any similar loans funded were for start-ups or existing businesses. Determine what kind of experience the applicants were required to have in order to meet the lender's management requirements and the terms of the loan and any loan covenants.
Ask about their loan-to-value, equity, reserve and cash deposit requirements in terms of getting a loan approved.
Ask about the loan size criteria so you can determine if your project size fits. Obtain a good understanding of the paperwork process. Who does what, who makes the loan decision, who closes the loan and most important, who will service the loan after closing.
Ask how long it takes for approval.
Ask whether the lender has the ability to portfolio the loan or whether participant lenders will be needed, since that affects the number of underwriting approvals your loan will undergo.
Ask about outside requirements such as minimum monthly deposits and compensating balance requirements.
What can you expect on an SBA loan and why should you consider one?
Because SBA loans are underwritten, guaranteed and administered in accordance with standards designed to make lending to small businesses easier and less cumbersome to originate and administer, the paperwork and administration associated with these loans is significantly less than under conventional banking standards.
SBA loans have the following characteristics, which are generally more borrower-friendly, less cumbersome and less expensive, and often represent terms frequently unavailable in the conventional lending market.
- Up to 100% financing for refinancing, acquisitions and expansions
- Competitive rates for both fixed and variable financing
- Loan amounts up to $5 million
- Loan terms for up to 25 years and no balloon payments
- Prepayment penalties only for the first three years of loan term
- No loan covenants such as debt service coverage, maximum owner cash withdrawals and compensating balances
- Loan approvals in as little as a week
- Closings and funding in as little as 30 days
- Local, regional and community banks are still lending to funeral service professionals.
- Government assistance programs (SBA Loans) are a viable, attractive alternative.
- It's prudent to carefully consider your borrowing options and interview available lenders.
- Be persistent and flexible.
Article by Kay Anderson, CPA for the February 2012 ICCFA Magazine reprinted in its entirety with permission. Kay Anderson is a senior loan officer for Live Oak Bank, Wilmington, North Carolina.