A year of prayer and searching had finally born fruit. Our congregation had found a building of the right size, location, and price—we thought.
One exciting Sunday morning we raised 15 percent of the cost. It was beautiful to see the sacrificial giving of young marrieds and singles, with their relatively low incomes. When the total was announced, we joined in thanksgiving to God for bringing us this far. Our four years of renting would soon be over.
But now we faced a hurdle: convincing a bank, savings and loan, or some other agency to lend us the rest of the funds. We knew we were an honest bunch, had good credit with bookstores, utilities, our landlord, and were fervently committed to the project. That, we discovered, was not enough. Bankers have a fear of the unknown, and there is plenty of that in a small, new church.
In making a loan, lenders are primarily concerned about getting their money back with interest on a timely basis. We had to convince them of our ability and intention to do just that. Churches have more difficulty in this selling job because their income is almost entirely dependent on voluntary giving. Although members may pledge dollar amounts, pledges are not enforceable and are subject to economic difficulties among the members, internal dissension, and people moving away on short notice.
In addition to questionable income, a church’s major asset—its building—is also of uncertain value because of its specialized design and limited resale market.
There is a happy ending to this story. We did get the loan. In the process, we learned much about securing church financing. While no two situations are identical, the following guidelines may be worth considering if you are preparing a loan proposal for a major capital project in your church:
The track record
First, it is important to have accurate, clear, and properly prepared financial statements. Hopefully, such statements have already been prepared using an acceptable accounting method. The quality of most churches’ financial procedures and statements depends largely on the qualifications of the treasurer. Our treasurer happened to be an accountant by profession, and this helped establish our credibility when the lending agency asked.
The statements to include in your proposal are annual budgets, receipts-and-disbursements statements, and statements for the various funds showing activity and balances. The lender will want to see not only the most current of these but also the past three to four years of each.
He or she will then compare the annual budgets with the actual figures on receipts and disbursements to see if your church is meeting its budget. If the actual fund flow is not close to the budgeted amounts, it indicates your church budget must not be a meaningful document. This raises questions about whether a loan will be repaid on a timely basis.
In analyzing your financial statements, the lending agency will be looking for several other items, which should be clearly delineated:
1. The three- to five-year trend in receipts. This may be shown as percentage changes and/or graphed to show the rate of change from year to year. An immediate red flag will be raised if the trend line is flat or falling. Even a decreasing rate of increase may cause concern, as it may forecast a decline in the future.
2. A careful separation of restricted receipts from unrestricted receipts. Be sure to show that contributions designated by the donor for a specific use were actually used for that purpose.
3. A description of any sizable church assets (land, equipment, vehicles) and estimates of their current market value.
4. A description of any large liabilities: mortgages, leases, other debts. Of course, the more you have, the weaker your proposal becomes.
5. Some indication of the proportion of disbursements going to external missions and ministries. A small percentage here may be considered a sign of a weak or nongrowing church.
6. A careful delineation of the building fund (if there is one). You should include such information as the size of the fund balance, uncollected pledges, campaign goal, and breadth of support (percentage of total membership who are contributors).
Ratios to remember
Second, in the course of discussing our project with several lending agencies, we discovered some fairly typical guidelines bankers use to help determine the viability of a loan proposal. Unless your church measures up to these, the project may have to be financed in some way other than a loan. Or maybe the project is simply not right for your church at this time—which is good to find out early.
These general ratios include:
1. Loan amount to annual church receipts. A reasonable rule of thumb is that the loan should not exceed three to four times the annual intake. Your church may be able to reach the high end of this range or even exceed it if you can demonstrate rapid growth in annual income now and in the future.
2. Debt service (mortgage payments) to annual church receipts. This should be no more than 35 percent; actually, 20-25 percent would be a healthy situation. Our debt service is approximately 22 percent of receipts, and we feel if it were higher, it would begin to infringe on other church priorities. It is vital that a church does not sacrifice its spiritual, emotional, and financial well-being on the altar of a large debt obligation.
If your church is growing, a higher percentage may be feasible at the start, since the percent will decline as income grows. However, taking on an excessive debt obligation may actually stunt growth if it creates anxiety, thereby sapping vision, vitality, and strength.
3. Loan amount to cost of project. This varies widely, depending on the lending agency. If you are dealing with a denominational agency, they may be willing to lend 100 percent. A bank is unlikely to put up more than 80 percent.
Again, a key consideration for the church is not “How much can we borrow?” but rather “What can we afford without jeopardizing the growth and vitality of our ministry?” I believe a church should raise as much of the project cost through donations as possible. This not only reduces the debt obligation but has the positive effect of solidifying the members’ commitment to the project.
4. Term of loan. Most lenders will offer at most a term of ten to fifteen years; in our case, the lending agency was willing to go twelve. Their threefold rationale was (a) it keeps the burden of loan payments on the church members who actually envisioned and approved the debt, (b) a growing church may outgrow its building in twelve years, (c) they did not want their money tied up in any one facility longer than that; they wanted to be able to serve other projects in the community.
Who are these people?
The third area of interest to lenders is the make-up of the church membership. Specifically:
1. Demographics. Lenders we talked to said they liked to see a minimum of fifty adult family units in membership. Our church barely met this test. We skimmed through by showing an above-average giving level per member. Lenders are concerned because the smaller the church, the more vulnerable it is to the shock of a falling membership, a poor regional economy, or dissension.
Lenders also like to see a good mixture in the age categories of the membership. A high percentage of children and young adults implies a good future. A healthy percentage in the thirty-to-fifty-five bracket implies strong leadership and financial support. A large percentage over sixty is considered negative—even though this age group gives steadily in the offerings. The problem is, they won’t be around for the future of the church.
Figures on the growth trends in each of the age categories will also help the lending agency make up its mind.
2. Economics. Lenders are looking not only for age diversity but economic diversity within the congregation. if your church is in a rural area or small town dominated by one industry (farming, mining, forest products), it poses a higher risk to the lender than a church in an economically diversified area. Your lender will be more favorably disposed toward the loan if you can demonstrate a broad spectrum of employment categories in your congregation.
3. The clergy. When making business loans, lenders place a great deal of emphasis on what they call “quality of management.” In essence, pastors are the senior management in most churches. In our case, the lender wanted to know how long our pastor had been at the church, did he have the respect and love of the people, was he a good preacher, and did he communicate well one-to-one with parishioners. People vote with their feet. A strong pastor implies growth and financial strength. Much of this information is qualitative, of course, and our lender gained it by questioning several parishioners and denominational leaders.
The project itself
Obviously, the lender wants information on the site and building. A location in an attractive, growing area creates a favorable impression. Why does the lender care? He wants some assurance that present members will stay and new members will be attracted. Present members are more likely to stay if the site is close to where they live.
The building itself should be attractive and, above all, functional. For example, a structure that meets the requirements for a day-care center or some other income-generating use (whether planned or not) will appeal to the lender. Not only does this provide potential income for debt service, but it also makes a more marketable building in case of default on the loan.
A pet project?
Finally, the lender is very interested in whether the membership broadly supports this project. We attempted to demonstrate this by relating how quickly we raised our down payment. We also showed the broad base of this giving: 80 percent of the membership gave, and the largest gift was only 12 percent of the total. In other words, the new building was not just a pet project of two or three people.
We pointed out that at the crucial congregational meeting, 80 percent of the membership attended. Even though some expressed misgivings and fears, 90 percent voted in favor of the purchase.
We discussed the quality and involvement of our lay leadership both in spiritual terms and professional expertise. For example, one of our elders is an architect-contractor whose knowledge in the area of site/structure layout and construction methods had been employed in our proposal.
Admittedly, it’s hard to document the qualitative aspects for a banker. But this doesn’t mean you should ignore them. They provide the icing on the cake, and most lenders will tell you these subjective factors often tip the balance in the decision.
We all know a major building project requires vision and congregational support. But even with these ingredients, a poorly planned, inadequate loan proposal may squelch a good project. Aspiration must be backed by arithmetic.
—Dan W. Hess
Elder, Sunrise Christian Fellowship
Seattle, Washington
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