Common Questions About Financing a Funeral Home
When financing a funeral home, prospective borrowers often ask several common questions:
- Where can I find a funeral home business loan?
- What interest rate can I expect?
- How long will my loan term be?
- How much will my loan cost me in fees?
- How do I start the loan process?
- What information will I need to provide the lender?
- How long does the financing process take?
Financing a funeral home business normally involves financing an acquisition, refinancing existing debt or financing the expansion of an existing business.
Finding a funeral home business loan normally starts out with a search on the web for funeral home financing. Trade publications are also a good source for active lenders to the funeral industry. These searches can turn up a variety of results. Banks, non-banks, brokers and consultants all advertise via websites and trade publications. Banks want good business loans and will often pay referral fees to get them. If you are not dealing with a bank lender, chances are the person you are dealing with is referring your loan to a bank in the hopes of getting a referral fee.
The interest rate on a funeral home business loan is right in line with the interest rate on any other business loan. Currently in late 2016 you can expect an interest rate in the 5%–6% range. If your loan is not fully secured by hard assets, it will likely be an SBA backed loan. This means the bank will lend you the money and purchase an SBA guarantee. This guarantee allows the bank to loan out an amount greater than the value of the hard assets being pledged as collateral. SBA backed loans normally have flexible amortizations and competitive variable interest rates. Sometimes fixed rates can be obtained as well. Commercial loans, based on the hard asset value of the pledged collateral will also have competitive rates and terms. Watch out for a bank or person asking you for an up front deposit to review your loan, this is not a normal practice and should be a red flag. Also watch out for loan terms that offer a 5-year fixed rate, a balloon payment after 10 years or a large prepayment penalty. The short term fixed rate and balloon payment may cost you more closing costs later if you choose to refinance your loan to get a better rate. The prepayment penalty may cost you if you do choose to refinance to a loan with better terms. These are all things to consider when going through the loan process.
The term of your funeral home business loan will generally depend on the use of proceeds. If you are buying all real estate, your loan term will likely be over 25 years. If you are not buying any real estate, your loan term will likely be over 10 years. If you are buying a mix of business and real estate your loan term will be somewhere between 15 and 25 years.
Fees on funeral home business loans depend on the type of loan. For an SBA backed loan the fees are minimal. A packaging fee of not more than $2,500 is normal. The SBA guarantee fee paid by the lender and built into your loan amount is a little over 2% of the loan amount. Commercial loans will often have what’s called and origination fee. This fee can vary depending on the lender and is normally 1%-2% of the loan amount. The other fees involved are closing costs and include real estate appraisals, environmental inspections, business valuations, surveys, title searches, transfer taxes and closing attorney fees.
The process of applying for a funeral home business loan is relatively easy. You will need to submit the basic terms of the proposed deal. This can come in the form of a term sheet or signed letter of intent. You will need to submit the tax returns and current year financials of the business you are buying “target business.” If you own a business, you will need to submit the tax returns and current year financials of the business you own “existing business.” You will need to submit your personal tax returns, a personal financial statement and a management resume or bio sheet on yourself. This will give the lender enough information to get your loan into underwriting.
Closing a funeral home business loan with real estate normally takes around 90 days and one without real estate about 60 days. The main reason for this difference is that real estate needs to be appraised and inspected. Appraisers often take 4-6 weeks once the reports are ordered. If it takes two weeks to get your loan approved and the appraiser takes 6 weeks, that’s already 8 weeks into the process. Buyer and seller attorney will need time to iron out the final purchase agreements as well. Nothing will happen as fast as you want so expect the process to be a series of hurry up and wait. When documents are needed, you hurry up to submit them, then sit back and wait. It’s just the nature of the process. Initially, if a lender is taking longer than two weeks to get your loan approved after you’ve submitted everything they’ve asked for, this could be a sign the lender may not approve your loan. If your deal is time sensitive you may need to look for a back up lending option.