The Bancorp in Wilmington, Delaware, has already carved a niche for itself lending to funeral homes. Now, it has a plan to make that specialty business line significantly bigger.
The $6.8 billion-asset company is teaming with Homesteaders Life, a West Des Moines, Iowa-based funeral insurance provider, to offer larger loans to funeral home businesses that are seeking to acquire rivals or refinance their operations.
About 90% of 19,000 funeral homes in the United States are small family-owned enterprises, according to the National Funeral Directors Association. Most of the banks active in the space tend to do their lending through the Small Business Administration’s 7(a) loan guarantee program, but SBA loans are capped at $5 million.
For funeral businesses seeking to expand via merger-and-acquisition, or transfer ownership to a younger family member, $5 million frequently isn’t enough, said Will Bischoff, vice president, strategic markets at Homesteaders.
That’s the niche-within-a-niche Homesteaders and The Bancorp are seeking to serve. The two companies plan to offer conventional loans of $5 million to $20 million for use in acquisitions, partner buyouts or refinancing.
“We saw [funeral home operators] needed more flexibility in their financing options at larger amounts than what is currently available," said Jeff Nager, executive vice president and head of commercial lending at The Bancorp. “Our partnership stemmed from a joint sentiment that independent owner-operator clients needed more financing than SBA loans can provide.”
David Nixon, a longtime Illinois-based funeral home consultant, agreed.
“Is there a need for it? I’m pretty sure there is,” Nixon said of the Bancorp-Homesteaders loan program.
The gap in big-ticket financing for funeral homes means owners looking for an exit strategy often have to sell the business to a larger firm rather than a family member or a trusted employee.
“There does seem to be a consensus that if your business is worth more than $5 million, there may be a limit on who can buy,” Nixon said.
Nixon characterized funeral homes as a “low-risk industry” for lenders, which explains why banks like the $8.2 billion-asset Live Oak Bancshares in Wilmington, North Carolina, the $460 million-asset United Midwest Savings Bank in DeGraff, Ohio, and the $10.3 billion-asset First Bancorp in Southern Pines, North Carolina, are active funeral home lenders, along with The Bancorp.
The $3.2 billion-asset Homesteaders Life is offering cash to help fund loans as well as referrals to seed The Bancorp’s pipeline. The partnership offers Homesteaders an opportunity to invest in assets that generate higher returns than it receives on its existing investment portfolio, Bischoff said. It’s also the 116-year-old insurer’s first foray into lending, so it was seeking a partner to manage underwriting and service the resulting credits, he said.
Also, with both Homesteaders and The Bancorp contributing to the pool of available financing “we’re able to spread the risk — what little risk there is,” Bischoff said.
Homesteaders Life distributes its policies exclusively through funeral homes, so it maintains relationships with thousands of them. It also has a history of assisting them in obtaining financing, making a lending venture — particularly one offering the prospect of larger loans to an industry undergoing significant consolidation — a natural next step. It’s been referring its funeral home clients to The Bancorp since 2013.
The Bancorp and Homesteaders are launching their venture at a time when many funeral homes are expected to change hands.
As many as 40% to 45% of funeral home directors are in their 50s or 60s or even older, “which means there’s a lot of transitions on the horizon,” Nixon said. Larger loans make it possible for a younger generation of family, or for a longtime employee to refinance a business and use the proceeds to cash out older owners intent on retiring.
“It was important for us to enter the space with a program that was competitive, different, and better than what is currently offered,” Steve Shaffer, Homesteaders’ chairman and CEO, said in a press release. “This is another meaningful way to commit our resources to support the long-term success of the funeral profession.”
The Bancorp has been an active lender to funeral homes for nearly a decade. Its portfolio totaled $8 million at Dec. 31. A small slice of its $316 million small-business portfolio, to be sure, but the Homesteaders partnership offers the chance to grab meaningful market share in an industry that generates $16.3 billion in revenue and employs more than 141,000 people according to NFDA.
“We see this product growing over time and through a soft launch, we already have several loans in the system,” Nager said.
The Bancorp also operates national business lines in franchise, senior care and health care lending. While there are currently no plans in the works to offer other industry-specific lending products, the company is “always looking at strategic opportunities to expand across multiple industry verticals as we did with the funeral industry,” Nager said.
