Live Oak Bancshares in Wilmington, N.C., believes it has found a way to lend to an industry that has long befuddled banks.

The $2.8 billion-asset company's four-person funeral home and cemetery lending team, led by Tim Bridgers, created an inventory growth loan that it hopes will soon generate more than $20 million in annual revenue from prospects that have historically struggled to finance expansion plans.

Live Oak introduced the product earlier this month after more than two years of research into how cemeteries operate.

“I do think there's going to be a demand,” Bridgers said. “We have worked with just about every major consultant in the space. We’ve worked with all the major manufacturing companies. Over and over again, we were validated that this was a needed product [and] that it would fill a great need for these owners.”

The effort highlights the importance of innovation and finding ways to reach underserved commercial segments.

The cemetery industry, for instance, generates more than $3 billion in annual revenue, according to the National Funeral Directors Association. At the same time, cemetery owners collectively have more than $60 billion stashed away in trusts designed to guarantee long-term income streams.

“The cemetery space is very large, it’s just not been given a lot of attention from a financial perspective,” Bridgers said.

Live Oak's product, at first glance, stands a good chance of succeeding, given the competitive void in cemetery finance, said Daniel Isard, a death care industry consultant and president of The Foresight Companies in Phoenix.

Few lenders have taken the time to understand the mechanics of the business, which has made it challenging for cemetery owners to access cash for property improvements or sales. Indeed, while hundreds of cemeteries change hands every year, “finding financing is like finding hen's teeth,” said Isard, who frequently works with individuals interested in buying and selling cemeteries.

In addition to financing, Live Oak is interested in capturing business from cemetery trusts.

“There will be times, depending on the particulars of the loan request, when Live Oak will seek trust assets in order to provide inventory growth loan financing,” Bridgers said. “Trust opportunities give us more reason to be excited about offering this innovative solution to cemetery professionals.”

While cemeteries have a lot of real estate, the land cannot be pledged as collateral given its use, Isard said. “Once you deed or consecrate an area as a cemetery, it’s not land anymore, it’s inventory,” he said, adding that many states prohibit using cemetery inventory as collateral.

"If a default occurred, you’d have to repossess the entire business," Isard added. "Most banks don’t want to be in the position of managing a cemetery."

Cemeteries can't even use their trusts as collateral, said Christine Toson Hentges, president of the Tribute Companies in Milwaukee, which own four cemeteries in Wisconsin and provides management and construction services to other cemeteries.

The only thing bankers can rely on is historic cash flows associated with presales, Toson Hentges said. Cemeteries need to show that they have a solid track record and will be able to repay a loan, she said.

As a result, Live Oak must spend considerable time vetting any cemetery loan it makes, Bridgers said.

Live Oak, which got into funeral home lending about seven years ago, made about $85 million in loans to that industry last year. Entering the closely related cemetery business made sense — assuming Bridgers and his team could find a way to provide reasonable financing.

“As you get into [the funeral home] profession, you can't help but interface with the cemetery space,” Bridgers said.

The bulk of cemeteries bring in cash by preselling burial plans, which helps pay for above-ground improvements such as memorial gardens, mausoleums or columbaria, the cost of which can easily exceed $1 million. Cemeteries must sell enough plans to finance the entire construction cost or at least a substantial down payment, Isard said.

A reliance on presales creates significant pressure on cemetery operators to generate income quickly enough to begin construction before clients die, a factor Isard referred to as a “giant sword of Damocles.” Meanwhile, it is harder to sell crypts that have not been built.

Even after a successful presale, industry manufacturers are often the only entities willing to lend to cemeteries.

“When I started recognizing that some of the manufacturing companies had to extend financing, I knew there was potential,” Bridgers said. “It really came down to a clear understanding of the cemetery space.”

While acknowledging the challenges banks confront when considering cemetery lending, Bridgers said the industry’s strengths get overlooked. Of the more than 8,000 for-profit cemeteries in business, a significant percentage operate high-margin, financially healthy businesses, he said.

Unlike many of Live Oak’s other products, the inventory growth loan is a conventional product that does not involve the Small Business Administration. To make it more attractive, payment terms were designed to encourage aggressive repayment during periods of high cash flow. In optimum circumstances, cemetery owners could pay off principle quicker, shortening the lifespan of the loan and boosting the value of any remaining unsold units.

While it is still too early to predict loan volume for 2018, Live Oak already has “an existing pipeline of customers," Bridgers said.

Live Oak’s business model, which features lending teams that specialize in a relatively small number of industries, afforded Bridgers and his team the time to research the business.

“It takes that verticalization to ... stay up with the trends and to provide meaningful education to our borrowers," said Bridgers, who joined Live Oak in 2014. He has a background in ministry, so the funeral home and cemetery team proved to be an ideal fit.

“I just fell in love with the profession,” he said. “It serves families at a very crucial time in their lives. I feel like I’m giving back and doing something beyond just coming to work every day."

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