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Your Church, Mar/Apr 2001
Getting the Money You Need
Lenders answer your church loan questions
by Jennifer Schuchmann
Opinions on whether a ministry should take on debt or not certainly differ from church to church and often from member to member. Think about it: your church may talk openly about religion and even politics, but what happens when the subject is borrowing money? To help you decide what's best for your situation, your church asked several prominent lenders to give us their best advice on church loans.
When should your church borrow money?
Churches should borrow money when they need to prudently finance some type of expansion of their ministry, recommends Mark Johnson, executive vice president of the Evangelical Christian Credit Union (ECCU) in Anaheim, California. The borrowing church should be a healthy church, in terms of finances and ministry. Financial records should be accurate and up-to-date—reflecting positive trends—and the church should have sound leaders committed to seeing the project completed.
"As a general rule churches should borrow primarily for capital projects," says Rob Dunn, vice president and senior credit products manager at First Union National Bank in Atlanta, Georgia. "Churches with an adequate level of financial management should not have a need to borrow for covering cash-flow shortfalls."
When should your church not borrow money?
If you are a new church, a church with declining contributions, or your membership is divided about borrowing, you should probably not take on new debt.
"It is very unusual, in our experience, to see a church be able to utilize a loan in a manner that reverses negative trends," says ECCU's Johnson.
Likewise, lenders advise against borrowing money during a shortfall.
"Borrowing to cover operational expenses because cash flow is decreasing is not the answer, it only worsens the situation," says Lyndon John son, president and owner of Johnson Mortgage Services in Cin cinnati, Ohio.
"There are times when a ministry should re cognize that some 'belt tightening' may be necessary," says David Turner, manager of marketing for Com monwealth Church Finance in Atlanta, Georgia.
Are churches good credit risks?
"A church is typically an excellent credit risk," Turner says.
Mark Johnson of ECCU agrees. "In our 35 years of history, we have found our client churches to be very good credit risks," he says. "The commitment of the local Bible-teaching church to honesty and integrity is a very real factor in the history of these church loans performing better than other commercial loans."
Dunn adds, "Generally speaking, churches and their leaders take a fairly conservative approach toward the use of debt to finance operations or capital projects. Consequently, the risks are well thought out and mitigated."
How should you shop for a loan?
A church should identify potential lenders by networking with other churches and denominational sources and by talking with key business leaders within your church. Possible lend ers in clude banks, credit unions, de nominational funds, and bond companies. Scott Rolfs, manager of the church and school financing division of Ziegler Capital Markets Group in West Bend, Wisconsin, warns churches to be wary of mortgage brokers who charge fees; often transactions can be handled more quickly and at less cost when a church communicates with lenders directly.
However, Lyndon Johnson of Johnson Mortgage Services says that brokers serve a valuable role. Ninety percent of churches that have their potential loan denied are rejected be cause they don't know how to properly present their financial information to a lender, he says.
When choosing a lender, look for one experienced with churches. Request a specific quote over the phone, then narrow your list to four or five lenders and put the loan out to bid.
At this point, a complete information package that includes the type of loan requested should be sent to each potential lender. The church should ask each one to prepare a bid and return it by a reasonable deadline. The church should also be prepared to meet with lenders to discuss the loan. Before signing any papers, make sure that you ask specific questions regarding fees (see "Questions to Ask Your Lender").
Who should meet with the lender?
"At a minimum the senior pastor and business administrator should be present," says Dan Mikes, senior vice president of Bank of the West, headquartered in San Francisco, California. He recommends that the pastor be prepared to share a brief history of the church and his vision for it and should demonstrate a working knowledge of church business affairs.
The business administrator should discuss his or her role in budgeting, preparing monthly financial statements, and other internal operating issues. "If the administrator doesn't do some of the talking, or worse yet, if there is no business administrator, then the experienced lender's en thusiasm will be dampened," Mikes warns.
Lenders want to know how a church conducts business, who the key players are, and what the bylaws state. "The lender does prefer to meet board members, elders, or committee chairpersons. However, as they are often laypersons, it is understood that they may not be available for all meetings," he says.
What does it take to qualify for a loan?
Most lenders want churches that are at least three years old and/or have had three years of positive cash flow. Typically, lenders will ask to review the last three years' budgets vs. actual financial statements. While a $10-million loan request may necessitate CPA-audited financial statements, church-prepared statements may be acceptable for a $500,000 loan. The church also must have a good credit history, and lenders usually want real estate collateral.
If the church has already completed a pledge campaign, the lender will review the results to judge the level of support. Lenders also may want to ensure that key church leaders, such as the pastor and executive staff, are secure in their positions and do not plan to leave. Finally, lenders will consider your church's existing debt.
"We are most interested in seeing that a church will not be putting their ministry at risk by taking on additional debt. We believe that historical cash flows combined with reasonably anticipated growth should allow for meeting debt service demands without placing the ministry under financial stress," Mark Johnson says.
How much does it cost to pay back a loan?
Dunn reports that with today's economic situation banks will probably offer floating interest rates ranging from prime minus 1 percent to prime plus 1 percent. Most banks would prefer to fix a rate for 5 years or less, though many will go up to 10 years. Other borrowing costs include a loan fee up to 1 percent and closing costs of around 1 percent.
The actual costs involved in borrowing vary dramatically based on factors such as loan amount, financial strength of the borrower, and complexity of the transaction. Most lenders interviewed were hesitant to quote costs, because they change so frequently and so many loan options are available.
What additional fees will you have to pay?
To understand your total cost, it is important to obtain an itemized list of all fees. Both the interest rate and fees must be compared when negotiating a loan. Focusing on the rate only or fees only will not provide a complete picture for the church.
In general, borrowers will pay for some type of loan origination fee (points), an appraisal, a title policy, and other smaller third-party fees. Additional charges could include: fees for credit reports, documentation preparation, and underwriting.
How much can your church afford to borrow?
A good rule of thumb is that a church can qualify for a loan that is up to two and a half times the church's annual in come. Some lenders are willing to go as high as three times a church's annual income.
When reviewing loans, Rolfs asks two questions. First, is the requested loan less than or equal to 75 percent of the total value of collateral? Example: A church with property worth $1 million should borrow no more than $750,000. Second, is the church's annual mortgage payment less than 33 percent of last year's total revenue? Example: If the church received $750,000 in revenues last year, then total loan payments should not exceed $250,000 per year.
All lenders will want to know how a church taking on additional debt plans to make their payments. "If the church has been spending all of its income historically, the addition of loan payments means their budget will have to change in some manner," Mark Johnson says. "Our counsel to church leaders is to fully consider how new debt might impact present ministry, particularly if anticipated growth does not occur as quickly as hoped."
How long should your church take to pay back a loan?
Lenders disagree on repayment schedules for capital projects.
Lyndon Johnson says a church should pay back a loan as soon as possible. He ad vises churches to have a 10-year goal but re cognizes that they should not overextend themselves. The church might take a 25- to 30-year amortization (or payment payback calculation) on the loan.
Johnson at ECCU agrees. "We encourage churches to repay their loans as rapidly as possible. Churches are often able to pay off their loans early, either through growth in income or through refinancing with us."
Rolfs offers another perspective. "We typically structure all of our loans on a 20-year term with a 20-year amortization. If the church can make the annual payments comfortably, there is no reason for them to pay off the loan within a shorter time frame.
"Remember, when used properly, debt is a great tool that can help expand ministry. If a church has a $50,000 operating surplus, they may be making a better investment if they put that money into ministry vs. paying down long-term debt. It does a church no good to build a fabulous new facility and not have the resources to staff it and outreach programs to serve the community."
A church must balance between the costs of monthly payments and the costs of interest payments. "Remember, the shorter the term of the loan, the less the interest expense to the church, but also the greater the monthly payment," Turner says.
What happens if your church defaults?
"A default simply means that a borrowing church is out of compliance with some element of their loan agreement," Mark John son says. A church that is late on their payments is, technically, in default.
Most lenders are willing to help churches weather temporary storms caused by an extraordinary expense or an unexpected de crease in income. Unfortunately, churches with debt are not immune from leadership problems that can cause financial havoc, a much more difficult situation.
The church can reduce the risk of such problems by implementing a church governance structure that includes a healthy accountability process for all key leaders, including the senior pastor. This should be clearly articulated in the by laws.
How do you make sure that you can repay your debts?
Lenders say churches must make debt repayment a priority, even in the face of mounting financial pressures. Lenders encourage churches to keep appropriate cash reserves for unplanned expenses and/or decreases in giving.
According to the lenders interviewed, churches that have found themselves in financial difficulty were trying to move too far, too fast, or did not have adequate management and financial controls.
Churches having financial difficulties should discuss the situation with their lender and their congregation, Turner urges. Most important, communicate with God.
"Many leaders are too embarrassed to discuss the financial situation with the church membership. Don't be!" Turner says.
James Hunter, senior loan consultant for RDH Business Services in Turnersville, New Jersey, knows members who have gone the extra mile to help out their church. "Some members have put up their homes as collateral for loans, and some have made personal loans to their churches."
Ultimately, deliberate debt may help grow your ministry but only if your church has a clear vision for what it wants to accomplish. If members are be hind the plan, they will stand behind the debt.
Jennifer Schuchmann (artwith@bellsouth.net) is a management consultant living in Marietta, Georgia.
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Questions To Ask Your Lender …
- Can I obtain a written, itemized list of all costs?
- Can you provide a written estimate of the interest rate, terms, and payment amount?
- Will a CPA audit be required for this loan?
- Is there a prepayment penalty if I want to retire the debt early?
- If I pay down my loan early, can I also reduce the payment amount?
- Are there any impounds required (insurance, taxes, etc.)?
- Will other collateral be required in addition to real estate?
- Can you provide a sample set of loan documents for our review?
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