So, whether if you’re just starting out or if you are looking for an injection of capital for your funeral home business, here are a few tips on how to go about finding financing.
Pledging Personal Assets
Personal assets play a major role in financing a business and are used to either be borrowed against or used as collateral to secure a bank loan. Collateral includes the things you personally own that won’t be used in the business, like cars, boats, jewelry, stocks and more. The bank can use this collateral as security for a business loan.
One of the tools lenders use to evaluate the value of a borrower’s personal assets is the personal financial statement. This looks at an individual’s assets and liabilities.
Bank loans are a popular source of small business funding; however, they can be difficult to get. There are a few different financing options when it comes to bank loans – conventional and guaranteed.
Conventional small business loans are loans made by the bank and are secured by the collateral and the promise by the borrower to pay the loan back. Banks like to make loans for start-up costs on hard-assets like buildings, equipment, vehicles, etc. It’s a little more difficult to get funding for working capital expenses like wages, advertising and cash flow. Banks look for borrowers with a minimum credit score of 650-680 and full collateral. Entrepreneurs starting a business will also need to invest 15%-25% of personal funds in the total project.
To apply for a loan from a bank, they will need personal tax returns, a business plan, and financial projections.
Guaranteed loans are loans that are backed by the federal government either through the SBA (Small Business Administration) or to a lesser extent USDA (United States Department of Agriculture). Same as the conventional loan, it’s still the bank’s money however, the SBA or USDA guarantees that a percentage of the loan will be repaid should the business fail and the owner not be able to repay the loan. This reduces the risk for the bank and is helpful in situations where the borrower doesn’t have a sufficient credit score or collateral. A loan guarantee also reduces the amount of personal investment to 10%-15%. The guarantee does come at a price with longer processing time, along with higher fees and interest over the conventional loan.
Revolving Loan Funds
Revolving Loan Funds (RLF) or sometimes known as micro loans are shorter-term loans at smaller dollar amounts. Depending on the program, these loans typically range from $500 to $150,000 and requirements are usually not as strict as a bank.
Revolving loan programs are available as an economic development tool to help communities prosper by providing financing for entrepreneurs who are not able to secure sufficient capital from banks. These programs focus more on job creation than credit score, improving access to small business funding and growing communities.
With the large gap between the number of business loans being requested and approved, alternative lenders have largely filled in the gap. Online lenders even offer SBA guarantees and are a great alternative for startups and small business owners without excellent credit.
Other benefits from alternative lenders include much less paperwork and an easier application process than traditional lenders, ability to have more flexibility regarding collateral requirements and types of loans offered and almost instant approval between hours to days. The downside is you will likely pay more in interest and have shorter terms than from a bank, but provide a great opportunity to build credit.
Another way to raise funds for a funeral home business if you own a home are home equity loans. Many people will react by saying, “I don’t want to risk our home” but if you own a home with equity the bank will likely ask for a lien on the property in order to make the loan. In either case, your home is at risk.
Home equity loans for a business are usually used as a down payment or used as collateral to reduce the amount of money the business owner needs to put down. Home equity loans from a business are usually at a lower interest and faster to process than conventional loans.
Peer to Peer Lending
Another non-bank alternative to borrowing for a new funeral home business is through peer to peer lending networks. P2P lending bypasses the bank and directly connects borrows with investors through an internet-based marketplace. This arrangement serves a need where financial institutions would not traditionally lend.
These networks bypass the bank and let people who need money borrow from people who are wanting to make a return. Interest rates are determined by the credit score of the borrower, but a great credit score is not required.
P2P lending provides a win-win for business and investors. For businesses, entrepreneurs who either don’t want to deal with lending requirements of a traditional bank or need to access cash quickly, P2P loans are a popular choice. Investors win since they are able to diversify risk by investing in several projects and get a return on their investment.
Business credit cards are a quick way to fund start-up businesses and sometimes even have introductory 0% financing. Even though the credit card is in the business name, the owner’s personal credit is still going to be a huge factor in getting the card. Any type of business from a freelance sole proprietor to an LLC is eligible to get a business card. While a little riskier than a fixed loan and more expensive after a low introductory rate, one can’t overlook the ease of funding from a credit card.
Depending on what you need the money for, credit cards may provide an easier way to finance the startup or expansion of a business. We know that nobody goes into business to lose money, but have seen several entrepreneurs that leaned heavily on credit cards to get started. Some were very successful, but some were not.
If you are buying an existing funeral home business, seller financing can be an effective way to lower the amount of money a buyer needs out of pocket to take over. Instead of the bank providing all of the debt financing, the seller acts as a bank and holds some of the loan. The buyer makes a payment to both the bank and seller.
Banks like to see seller financing as it demonstrates the seller has enough confidence in the buyer to put their money on the line. There are many ways to structure payments to the seller including; a percentage of sales, monthly payments, a balloon payment, etc.
This does put the buyer at a bit of a disadvantage in trying to negotiate the selling price but may be necessary to get the deal done. Besides being able to sell the business, the seller has the opportunity to possibly lower their tax burden by taking payments over time instead of all up front and make additional money through interest.
Leasing is an effective way to reduce the amount of money needed to start a funeral home business. Leasing allows the business to use machinery, vehicles or other equipment similar to how one would a lease a building. A leasing company owns the asset but the business uses it.
A funeral home business may want to lease to get smaller monthly payments or less upfront cost, but leasing also may provide tax advantages over purchasing. Downsides include costing more in the long-term and being contractually obligated to continue paying, even if the equipment isn’t being used.
An angel investor is someone who invests in small business startups. Often, angel investors are colleagues of friends or family. Most angel investors are former entrepreneurs, who can also offer valuable business advice alongside the capital. However, you are going to need a solid business plan to convince an angel investor to finance your startup.
Note that angel investors are not lenders. Money from an angel investor is an investment rather than a loan. As you begin to make a profit, you will need to give part of your profits to the angel investor. Angel investors own part of your business as a result of their investment. They expect a high rate of return on their investments.
When you ask an angel investor for money, make sure to give them a clear exit strategy, as they typically don’t want to be involved with a company for more than five years.
As with any new venture, it’s important to thoroughly research your location and your target market to understand the services that will be most in-demand. Prepare your business plan, seek out other professionals who already operate successful funeral home businesses, lean on guidance from professionals like business formation lawyers, accountants, and others. The stronger you build your foundation, the greater chance for your success.