By: Andrew Kennedy, Senior Loan Officer, Live Oak Bank
Many funeral homeowners may find navigating Small Business Administration lending programs daunting.
You may have heard they are overly complicated or only for businesses in dire straits. These myths couldn’t be further from the truth, especially for thriving funeral homes looking to grow and adapt in today’s market. SBA loans are powerful tools designed to support funeral home businesses. Still, misunderstandings persist, often fueled by experiences with banks unfamiliar with the unique aspects of the funeral service industry and SBA lending intricacies.
Lenders specializing in SBA loans frequently hear questions about common myths surrounding these loans, so Live Oak Bank has created this guide to debunk those myths and clarify how SBA lending can benefit your funeral home.
Myth: SBA Loans Are Not Designed with Funeral Homes in Mind.
This myth is not true. SBA loans are inherently borrower-friendly, and their flexibility makes them exceptionally well-suited for funeral homes. Compared to conventional loans, SBA loans generally offer:
- Greater Flexibility with Equity and Collateral: Funeral homes often have unique asset structures. SBA loans understand this, offering more leeway with collateral requirements. This can be crucial if your assets are primarily tied to real estate, specialized equipment, or even the goodwill of your established business. For example, if you’re looking to expand your chapel or cremation facilities, SBA loans can be more accommodating than conventional loans that might demand higher equity in real estate.
- Longer Repayment Terms: Cash flow in the funeral service industry can be seasonal or depend on larger, less frequent service arrangements. SBA loans offer longer repayment terms with a 7-10-year standard, up to 25 years for real estate components, aligning better with the financial realities of a funeral home. Imagine undertaking a major renovation – the extended terms ease the pressure on your monthly cash flow during repayment. Conventional loans, in contrast, might push for a shorter 3-5-year balloon payment, which can create unnecessary financial strain.
- No Financial Covenants or Balloon Payments: Unlike conventional loans with restrictive financial covenants or large balloon payments that can blindside you, SBA loans offer stability and predictability. You won’t face unexpected demands or a massive payment due after a few years. This predictability is vital for long-term financial planning and investment in your funeral home’s future.
- Favorable Interest Rates: In most cases, SBA loan interest rates are industry standard and often more favorable than conventional bank loans, preserving more of your profits for reinvestment in your business.
Myth: Securing an SBA Loan is a Slow and Painful Process for Funeral Homes.
While SBA lending does involve documentation, the process doesn’t have to be slow or inefficient, especially when working with a specialist. The key is partnering with a lender who is knowledgeable on SBA lending and the funeral home industry. The documentation requirements are largely the same as any conventional loan – lenders must assess your financial health, regardless of the loan type.
To streamline the process, look for a lender participating in the SBA’s Preferred Lender Program.
PLP lenders, like Live Oak Bank, have the SBA’s delegated authority to approve loans internally. Working with a PLP lender significantly cuts down on processing time because the bank acts directly on behalf of the SBA, eliminating the wait for external SBA approval. A PLP lender with funeral home expertise will also be adept at guiding you through the documentation efficiently, knowing what’s needed and how to structure the loan to align with your funeral home’s specific circumstances, such as financing a pre-need insurance portfolio acquisition or the purchase of a competitor funeral home.
Myth: The SBA Directly Funds Funeral Homes.
The SBA providing direct funding is a common misconception. The SBA doesn’t lend money directly to funeral homes or small businesses. Instead, the SBA offers a government guarantee to certain banks. This guarantee reduces the bank’s risk, encouraging them to lend to businesses like funeral homes – companies that might not qualify for conventional loans with equally favorable terms. Think of the SBA as a co-signer; they back a portion of the loan, enabling the bank to offer credit to your funeral home with more advantageous terms than would otherwise be available.
Myth: SBA Loans are Only for Struggling or High-Risk Funeral Homes.
This outdated perception is entirely false. SBA loans are not just for businesses facing hardship. Many thriving and sophisticated funeral homes utilize SBA loans for strategic growth initiatives, such as acquiring another funeral home, building a new cremation center, or investing in state-of-the-art embalming equipment. The SBA guarantee allows banks to support sound business plans that might fall outside conventional lending parameters, not prop up failing ventures.
While all lenders must follow standard SBA eligibility requirements, the core of loan approval comes down to sound underwriting. Lenders assess your funeral home’s 5 Cs – Character, Capital, Conditions, Collateral, and Cash Flow. A lender with expertise in the funeral home industry, like Live Oak Bank, possesses the specific knowledge to accurately assess these factors within the context of funeral service operations. Lenders with funeral home industry knowledge understand the nuances of your revenue streams, the value of pre-need contracts, and the inherent strengths of well-managed funeral homes, allowing us to structure a loan that truly fits your needs and growth aspirations.
Myth: SBA Loans Demand Excessive Collateral from Funeral Homes.
Excessive collateral requirements are another persistent myth. While SBA guidelines require lenders to take available collateral, such as a junior lien on real estate with equity, the program explicitly states that a creditworthy borrower should not be denied solely due to a lack of extensive collateral. This is particularly relevant for funeral homes, where value is often tied to the ongoing business, reputation, and community relationships, not just hard assets.
If your funeral home has limited real estate to pledge but possesses strong cash flow, a solid reputation, and experienced management, you can still secure SBA financing. The key is to find a lender skilled in assessing the overall financial strength of your funeral home and comfortable relying on that strength for repayment. Lenders without funeral home industry expertise may default to a rigid “real estate or hard asset” mindset. With their deep understanding of the funeral service sector, other SBA lenders recognize your business’s intrinsic value beyond just physical assets. They will work to understand your business’s financial picture to secure the financing you need.
Don’t let myths deter you from exploring SBA loans. SBA loans offer a powerful and flexible financing solution for funeral home owners looking to expand, renovate, acquire, or strengthen their financial foundation. By partnering with a reputable lender that specializes in SBA lending and deeply understands the funeral home industry, you can navigate the process efficiently, unlock the capital needed to achieve your business goals and continue serving your community with excellence.
Andrew Kennedy is a senior loan officer at Live Oak Bank, specializing in funeral home and cemetery financing. He has over six years of experience in the industry and has helped funeral professionals secure over $100 million in loans. Kennedy is also a passionate advocate for the funeral industry and is actively involved in community outreach and education. He has been recognized for his leadership and innovation and was recently named one of the ICCFA’s 40 Under 40. He enjoys spending time with his family and playing golf in his spare time.
