FDLIC Corporate Officers blog about current issues in the preneed industry and in funeral service, providing insight, commentary, and news updates.
To Loan or Not to Loan
Monday, September 12, 2011
Interest rates are at an all-time low and the Federal Reserve is committed to keeping rates low for the next two years in an effort to stimulate the economy. You would think that individuals and businesses would be clamoring to borrow money and banks would be anxious to lend it, when in fact U.S. banks are holding approximately $2 trillion in cash--up from $350 billion prior to the financial crisis in 2008! Banks are not lending money due to tighter government restrictions, and businesses and individuals in the U.S. are not borrowing money due to the perception of a weak economy and an uncertain future.
As an investor/lender, this situation has put FDLIC in a rather auspicious position. We choose to see the glass as half full and not half empty. Our money is still on our funeral home clients. Over the last several months we have taken a serious look at our funeral home lending program and believe that we now have one of the most competitive offerings available. FDLIC, unlike other financial institutions, has an in-depth knowledge of funeral operations and business cycles. That knowledge makes it easier to analyze and understand the funeral home's financial and market information. Because we know the industry, we also know many funeral home owners, their capabilities and reputations within the industry and their communities. This factor in our loan review process is just as important as the financial information that is provided.
Through our Thoughtful Decisions Funeral Home Financing Program we will assist customers in funding the purchase, refinance or new construction of a funeral home. FDLIC's expanded mortgage program provides a variety of amortization and interest rate options that are based on the percentage of the loan to value of the real estate, as well as the credit quality of the borrower. Loan amounts range from 75% to 90% of the appraised value of the real estate or purchase price whichever is lower. Construction loans are a percentage of the actual cost to construct. Interest rates are based on the Wall Street Journal Prime Rate plus a factor that is determined by the amount of the loan and the financial stability of the borrower. Interest rates are fixed for five (5) years. Amortization options range from ten (10) to twenty (20) years.
Collateral for such a loan will be a perfected senior security interest in land and buildings. In the case that the real estate value does not fully collateralize the acquisition, business asset/goodwill financing is available through an affiliate with similar terms. In most cases, personal guarantees are required by the funeral home owner(s). Loan documents will include financial covenants and certain restrictions not unlike other financial institutions. FDLIC does not collect a loan origination fee, but the borrower is responsible for paying all closing costs.
Information required to initiate the loan process includes a purchase contract or letter of intent to acquire a location, a current real estate appraisal (less than one year old), three years of financial statements/tax returns from the funeral home to be acquired or income and expense projections for a newly constructed funeral home, and three years of financial statements/tax returns from the guarantor(s). Additional items such as a Phase I environmental study and a survey will be required at some point in time.
The Thoughtful Decisions Funeral Home Financing Program is open to current FDLIC funeral home customers, as well as potential new customers with the commitment to use FDLIC as their sole provider of preneed products and services. We prefer to think of each loan as the opportunity to create a new partnership--we are not just your banker. The Thoughtful Decisions Funeral Home Financing Program is just another way that we can fulfill our mission to be the "best, most respected provider of service to the funeral industry."