Whether you're looking to purchase new church property or update your existing facility, a loan is likely one of the options you're considering to make that happen. Taking on debt is a significant decision that will impact the financial future of your church for many years. Before you sign on any dotted lines, take the time to prepare and plan carefully to make the best decision for your church.
Depending on the amount of the loan and complexity of the project (new construction being more complex than a small remodel), there's a lot of information you'll need to provide to potential lenders plus plenty of details you'll want to know about the loan terms and about each lender.
To break up what could be an overwhelming effort, let's look at this process in three key steps preparation, application, and implementation.
Step #1: Preparation
Review your financial records for accuracy and completeness
Make sure your financial records are in order so you can easily produce financial statements for the last 3-5 years. Potential leaders want to know if you're a reasonable risk and that, based on prior history, it's realistic to expect you can make your loan payments on-time.
If you haven't had your financial records audited recently, you may want to do that before applying for a loan. Many lenders will request audited financials plus an outside auditor may be able to spot potential issues.
Pull together information about any existing debt obligations and current assets (cash-on-hand and property values). Lenders will likely ask for this information in your application.
Document the purpose of the loan
Are you looking to buy land and build a new church facility? Do you want to remodel your existing facility? Depending on the purpose, potential lenders will want to know what work you've done so far to plan for this project. They may ask about construction plans and contractors, appraisal of the land and/or existing structures, cost breakdown of the project, timelines, etc.
Compile background information
Pull together a brief history of the church and it's leadership, along with key statistics. Lenders may ask for information about your senior pastor and elders, history of the church, number of weekly attendees, past success with pledge campaigns, and more.
Determine how much you need to borrow
Consider running a capital campaign to raise as much money as possible—reducing the loan amount—or you may want to ask your congregation to submit pledges towards paying off the loan.
Also, run the numbers to determine what monthly loan payment you can easily afford based on realistic income projections. Don't assume your church will grow by 50 percent over the next year with tithes following suit. While that's great for big-vision goals, when it comes to taking on debt now is the time to be cautious and conservative.
Build up your savings
If you don't have this already, boost your church savings account with 3-6 months of operating expenses. This looks favorable to potential lenders and helps ensure you can continue making loan payments even if income is occasionally below forecast.
Gather a team
Bill Clark, Director of Administration for Redeemer Covenant Church, recommends pulling together a team to help you evaluate loan options, including someone on the team who has experience with commercial lending. "We had a Treasurer of a large regional bank on the team and to say the least, that woke up' the lenders we were dialoging with."
Advice from a lender
When asked how church leaders can prepare for a chance of being approved for loans with the most favorable terms, Dan Mikes, EVP/Division Manager for the Religious Institution Division of Bank of the West, responded with the following recommendations:
"The Business Administrator (BA) should be the point person communicating with the bank, able to present and discuss comprehensive consolidated financial statements which reflect all funds (general T&Os, designated, missions, etc). The BA doesn't need to be a CPA and the statements do not need to be in GAAP format to get a loan approved and closed.
The experienced church lender can work with the BA to correctly interpret the statements as long as all funds are included. In order to get the lowest possible interest rate on the loan, the BA should also be prepared to discuss the ministry's current depository relationship, the current merchant processing relationship, and whether a commercial credit card is utilized by the organization.
Opening these potential additional business opportunities for competitive bid will enable the lender to meet it's "relationship yield" targets with a lower interest rate for the loan."
Step #2: Application
Research potential lenders
Ask other church leaders and individuals from your congregation who work in the banking industry about their experiences with various lenders. What did the loan application process look like with their lender? Did the lender work with them to determine what rates and loan terms would work best for their situation? Did the lender answer their questions in a timely manner? How quickly did the lender return phone calls and emails?
Remember: You're shopping for a service from a lender. They will make a profit from doing business with you and should provide a quality service in exchange.
Here are a few questions Dan Mikes recommends you ask potential lenders:
How does your bank treat not-for-profit commercial clients differently than its other commercial customers?
Do you have a variety of lending options, and financial products that are unique to ministries?
Can your bank provide consultation and tailor the debt structure in a way that enables the flexibility to prepay debt with no risk of penalty, while also providing some longer-term insulation from future interest rate volatility?
Step #3: Implementation
Evaluate each loan offer
Review the loan covenants in detail. Covenants are specific requirements a lender must adhere to throughout the life of the loan. Lenders may require a church to maintain certain amounts of cash on-hand at all times, not take on any additional debt, provide audited financial statements each year, etc. If you violate these terms, the bank could call the loan.
If you proceed with the loan, make sure you put into place processes and policies to ensure you stay in compliance with the loan covenants.
"Lenders more accustomed to lending to for-profit commercial clients may require loan covenants which ministry management could find to have an impact on their management autonomy- such as liquidity requirements, minimum debt coverage ratios, and limitations on capital expenditures." Dan Mikes
Find out if there are any prepayment penalties. It's always better to not have any debt, so you'll want to pay off the loan as quickly as possible. Make sure your lender won't penalize you for paying off the loan early.
Ask about the interest rate and whether it can increase during the life of the loan.
Does the loan include a large balloon payment at the end or is the total amount evenly spread across the life of the loan?
Once you've carefully weighed your options and have reached agreement with your leadership team, it's time to proceed with your preferred lender and start your new project.
Applying for and obtaining a loan can be a daunting process. However when you walk through this process methodically and seek wise counsel along the way, you're much more likely to have a positive experience and a successful project.
If this topic interests you check out Writing a Killer Loan Request for Your Project, offered at WFX Conference & Expo 2018 Orlando.