Commercial loan interest rates are rising, but they’re still lower than they have been over the last decade. This leaves many funeral directors wondering: Is it time to refinance?
Refinancing your funeral home’s debt to a lower rate can help free up cash flow, increase your financial flexibility, and secure you a more favorable agreement with your lender; however, beyond interest rates, there are some key factors you’ll want to consider before deciding to move forward.
1. Will The Interest Rate Be Lower?
As anyone who recently refinanced their mortgage can tell you, lower interest rates lead to lower monthly payments. Similarly, if you can secure a lower interest rate on your business debts, then you can save some considerable cash in the long run.
For example, if a funeral home owner has a $50,000 loan paid off over five years, and the interest rate is 5.79%, then they would owe about $7,700 in total interest. Conversely, if the interest rate were 3.97%, then they would owe under $6,000 in total interest.
As a general rule of thumb, if interest rates drop one point or more below what you currently have, then it’s likely worth refinancing the debts of your funeral home. Just be sure to consider the closing costs of securing a new loan––origination fees, underwriting fees, and even SBA guarantee fees––which generally add up to about 3% to 6% of the total loan amount.
2. Has Your Credit Significantly Improved?
When a small business is just getting off the ground, in many cases, obtaining financing is difficult, leaving the owner to accept whatever loans they qualify for. However, as your funeral home grows and establishes a lengthy transaction history, it will build up substantial business credit.
If this is the case for your business, then refinancing could help you secure more favorable loan terms. Business credit factors heavily into determining the interest rates you qualify for. Generally speaking, the higher your business credit, the lower your interest rates. Additionally, higher credit scores will allow you to take out larger loans for expansion purposes.
3. Do You Have Equity in Your Funeral Home?
After years of making your payments on time, you’ll likely begin to put a dent in your loan and establish substantial equity in your funeral home.
When you’ve built up equity in your business, you can use refinancing as a tool to convert this equity into liquid cash. While this won’t necessarily help you pay down your debts, it can certainly be a helpful way to pay for emergency expenses.
4. Has Your Funeral Home Grown?
In addition to looking at your business credit and requested loan amount, a lender will also consider the financial history of your business. This puts newer funeral homes at a disadvantage, as they don’t have a demonstrated history of financial success. As your funeral home grows, however, lenders will be more likely to offer you favorable refinancing rates.
In most cases, once your funeral home’s revenue enters the realm of six figures, whether from extensive growth or an acquisition of another business, lenders will likely offer you lower interest rates on a refinanced loan. Alternatively, once your funeral home has been operating for two years, you can expect further decreased interest rates.
If you consider this from the perspective of the lender, it only makes sense. When a business is just starting, a lender will have little evidence to support the idea that you’ll be able to repay your loan, but once you can demonstrate a proven track record of financial success, lenders feel a greater assurance that their loan will get repaid.
5. Is Your Funeral Home Beginning to Plateau?
Alternatively, if your funeral home’s growth has slowed or stagnated, refinancing can provide you access to the capital needed to get back on track to growth.
In recent years, the rising popularity of cremations––coupled with the waning popularity of traditional burials––has decreased revenue for many funeral homes. To address this state of affairs, a funeral home owner might consider refinancing an existing loan into a larger one in order to fund the creation of owned and operated cremation facilities.
Additionally, depending on other factors such as credit, equity, and interest rates, this type of refinancing could also result in more favorable repayment terms.
6. Do You Have Multiple Smaller Loans?
Most funeral homes require multiple loans––commercial mortgages, equipment financing, and SBA loans––to finance their creation and operation. Naturally, simultaneously navigating the terms of multiple loans can become complicated and burdensome, making it worthwhile to consider consolidation.
If managing multiple loans becomes difficult, you should look into refinancing smaller loans into one larger loan. Not only will this streamline the repayment process, but it may also offer you more favorable interest rates and free up some cash flow.
Know the Right Moves
Whether you’re looking to secure a better interest rate or free up some cash for expansion, refinancing business loans can be a difficult task. To determine if refinancing is the right move, you’ll have to consider interest rates, your business’s history, and how it stands to perform in the future. Before you pull the trigger on a refinancing operation, it’s best to talk to the experts.
At Johnson Consulting Group, our team of funeral home consultants and accountants can help you understand how a refinanced loan can stand to help your business. With years of experience in the death care industry, we have a proven track record of helping funeral directors secure more favorable financing, as well as helping them strategically use any freed-up cash.
While interest rates are climbing for all types of loans, they’re still at historic lows. To help determine if refinancing is right for your funeral home, consider reaching out to JCG’s team. We’ll walk you through the options that best suit the continued needs of your business.REFINANCE THE RIGHT WAY