Top seven success factors in church lending
If your church is entering a building campaign, there's a high probability that you will need to borrow some of the funds, at least for a season. Lenders can be very individualistic about their lending policies, but there are some criteria that are almost universal. If your team can prepare a financial package that addresses each of these points satisfactorily, your chances for successfully obtaining a loan improve dramatically.
Over the years, we have spoken to several banks specifically about church lending, and following is our list of seven leading success factors that your loan package should include.
Church History - Overall, the history of the church is a key consideration. These days, many young churches are growing churches, but longevity tends to help with loan approval. In your loan package, be sure to include when your church was founded, the success of previous fund-raising campaigns, historic growth rate, and other positive trends. But don't leave out the potential negatives. Being upfront with how your church has handled speed bumps along the way, such as any previous splits within the church, how any previous financial downturns were handled, or other known problems and solutions may help establish your church as a responsible, healthy organization.
Being upfront with how your church has handled speed bumps along the way...may help establish your church as a responsible, healthy organization.
Historic Cash Flow - Generally, a church structure will be considered "single-use" by most banks. The reliance on the collateral, then, is weak when compared to most commercial businesses, which puts even more emphasis on the overall financial strength of the church. Obviously, then, historic cash flow is key. On the positive side, many churches, particularly churches entering a building program, have a long history of healthy financial stewardship. I've heard stewardship explained this way: spending less than you earn and doing it for a long time. If this describes your church, highlight your history in your financial package. As a note, we have also found that most churches do not accumulate; rather, they utilize the resources that God provides for ministry. To highlight the strength of your historic cash flow, segregate those expenses that could be safely labeled as "discretionary." This will allow a bank to easily see what your free cash flow could be.
Many churches, particularly churches entering a building program, have a long history of healthy financial stewardship. If this describes your church, highlight your history in your financial package.
Ratio Analysis - There are a number of financial ratios that are measured for every bank loan, but others are unique to churches. Below are a handful of key ratios that should be computed and clearly shown in your financial package. If you are using church management software, most of these data points and ratios can be obtained very easily.
Annual Gross Income / Giving Unit - This ratio indicates the average donation of each giving unit or family. Banks can use this to determine whether this amount is considered reasonable based on the demographics of the congregation. If you have your church's demographic data available, it is helpful to provide this to the bank as well, perhaps in a comparative format. (How is your demographic data similar or different to the census data?) Otherwise, they will base their calculation on generalizations derived from census data that may or may not be relevant to your church. Census data will likewise not have church specific membership data that might be relevant to telling your financial story. (More on that later...)
Monthly Loan Payment / Giving Unit - This ratio indicates the monthly donation by family unit required to meet loan payments. Obviously, the lower the metric, the better.
Annual Debt Service / Annual Budget - This metric indicates the percent of debt service covered by the annual budget. A good "rule of thumb" maximum is 33%; "healthy" is 20% or less.
Total Debt / Annual Income - This measures the debt capacity of the organization. One bank's recommended maximum is 2.5 times annual gross income, but the lower the ratio, the better.
Congregation demographics - The demographics of your specific congregation are vital to the bank's overall evaluation. Therefore, provide a section with a number of statistics that will help your bank understand your congregation. This would include such things as the range of age of your membership base (too much concentration in either too young or too old adds to the level of risk), geography (are there competing churches in the area, travel from previous location, etc.) average household income of membership, and the definition of "giving unit. If you have a pledge campaign, it might also be helpful to include some specific metrics on the campaign, particularly the top 10 or 15 largest pledgors as a group, such as average length of membership, historical giving patterns, and the like. The bank will be looking for any factors that could affect their ability to meet pledges and ultimately the repayment of the loan, so this is an opportunity to show your strengths.
If you have a pledge campaign, it might also be helpful to include some specific metrics…such as average length of membership [and] historical giving patterns.
Church Staff - In addition to your congregation, your staff is obviously vital as well. The pastor is the key to the success of any building program and to the future of the congregation. To strengthen your outlook with the bank, highlight some success factors, such as how long your pastor has been with the church and the likelihood of continuing. In addition to the staff, it would also be appropriate to emphasize the quality of your church lay leadership.
Denomination Affiliation - This isn't necessarily a requirement for a loan, but one bank we spoke to indicated that they have found that the level of risk is significantly higher for a church that does not have a strong affiliation with or membership in a "mainstream" denomination. If your church is non-denominational, other affiliations could be beneficial and should be highlighted. Beware, though, that this factor in and of itself could lead to a loan declination. Therefore, even though a church may be "self-governed," affiliations within a "mainstream' denomination could provide advisory and other support, which, in the bank's eyes, lessens the risk of the loan. If your church is non-denominational, highlighting your other strengths becomes even more important. Also, if you have other affiliations or associations that the bank may view as a strength, spotlight those instead.
If your church is non-denominational, highlighting your other strengths becomes even more important.
Guarantors - This can be a rather sticky subject. Banks will seek personal guarantees whenever possible to minimize their exposure. However, it is rarely a firm requirement. If your church is not able to obtain a loan without personal guarantees from your staff or lay leaders, then you should take a very hard look at whether or not you should be entering into the contract at all. There are mitigating circumstances and exceptions, of course, but often the troubles caused by personal guarantees far outweigh the benefits.
If your church is not able to obtain a loan without personal guarantees from your staff or lay leaders, then you should take a very hard look at whether or not you should be entering into the contract at all.
Construction Risk - This risk is generally the same for a church facility as any other commercial project, so banks will follow the same principals in this regard. That typically means requiring bonding of larger contractors, or at least larger subs. It tends to be a major exception to accept a "cost plus" contract or the use of construction managers, due to their open-ended nature. As a result, if you have selected a contractor before approaching your bank, particularly if your contractor has strong experience with churches, highlight their strengths to the bank. Demonstrate that the construction risk is limited because of your selection.
Organizing your financial data in the manner described above is certainly no guarantee that your loan will be approved. However, it demonstrates good fiscal responsibility and professionalism. My grandfather used to say that you never get a second chance to make a good first impression. Putting together an organized and complete financial summary before you approach a bank for a loan is a great first step towards establishing trust with a prospective bank. You might also learn a thing or two about your church in the process.
