Securing a Funeral Home Loan

Banks are in the business of renting money by lending it to you at interest. Before they’ll provide you a loan, they want to be confident that you’ll be able to pay it back. They use multiple ways to determine their confidence, some financial and some non-financial.

Simply meeting the bank’s financial requirements is not enough. They want to see other signs that you are a good risk for their capital. Just keep asking yourself as you work with your consultant, put your package together, and meet with bankers: “Will these actions increase the bank’s confidence in me?”

A solid financial history, a reasonable purchase price, and projections that are doable are the beginning of the story. But just as important to your banker is a positive attitude and determination.

Your character is a necessary condition. Lenders look for a clean credit report and a consistent record of paying your bills on time. They also want to see if you have the education, experience and emotional resilience to run a business. A positive personal attitude and a constructive business plan is a surefire way to impress all financial lenders and investors.

Determine the capacity of the funeral home you are buying to produce cash. Lenders only use historical tax returns and financial statements to determine your ability to repay the loan and still have adequate funds to run your business.

Your own capital
How much of your own capital are you willing to invest? Lenders will not lend you the entire purchase price of the funeral home. They expect you to provide some of the capital, typically a down payment of 20%. The down payment reduces the bank’s risk and it shows the bank that you are confident enough in the business to invest your own capital.

Seller financing
The seller is part of the equation. Lenders often want to see the seller provide some of the capital in the form of a loan to you. This is another way for the bank to lower its risk. Their thinking is, if the seller is willing to finance some of the purchase, then the seller must be confident that the new owner will be able to run the business profitably.

Real estate collateral
Your purchase includes two components: the real estate and the business. The business provides the cash flow. The real estate provides the collateral. The bank looks at your cash flow to determine how much you can borrow. It secures the loan with the real estate that comes with the funeral home. 

The mix of the value of the business and the real estate determine the term of the loan. If it was all real estate, the term could be as long as 25 years. If there was no real estate, the maximum business loans are about 10 years. If the mix of the value of the business and the real estate are 50:50 (which is typical), then the term of the loan will be around 16 years. 

Decide how much you need to borrow. The amount you can borrow is directly linked to the amount of cash flow the business produces each year. Contact us and we’ll walk you through how to calculate the amount you can borrow based on the cash flow of the company you are planning to buy.

The truth
Be truthful to your banker and your business consultant. You may have a flawed credit record. No one is perfect. Better to lay all your cards out on the table with your financial intermediary so that the two of you can figure out the right strategy for approaching the lender.

Prepare the documents you need to support your proposal. Your loan officer or business consultant will know what you need to prepare and how to package it.

Know how to shop your loan. It’s a thin market for funeral home loans. Look at banks first, non-bank lenders second. Banks will give you better terms, but they are harder to qualify for. Even if you have to go with a non-bank lender, you can always build some history and then refinance with a bank. Your business consultant can help you to find a lender that will give you reasonable terms.

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