Long-term interest rates appear to have bottomed out and are projected to increase by year-end. So, now is the time to consider borrowing funds to undertake important building initiatives or refinancing existing debt.
By Therese DeGroot
When refinancing a loan, be sure that the calculation of money saved by refinancing to a lower rate includes all costs, penalties and — if an interest rate swap is involved — breakage fees incurred to refinance.
Securing a low, fixed-rate loan now will allow for proactive budgeting, predictable debt service and ensures that ministry and outreach programs continue to be funded, as well as expanded ministry.
An important component to this process is finding a bank that is experienced in church lending. A bank that understands the unique nature of how churches operate is critical (including the unique cash flow nature of churches), as is as a bank that is well-capitalized and liquid.
2 key strategies
So, what are banks looking for from churches to determine which are the best borrowers deserving of the best rates?
Keep in mind: presentation is everything. A well-organized, professional and thorough loan package that represents how important you believe your stewardship responsibilities are is a must. The better the quality of your information, the more successful you will be in securing the best financing available at the best rate.
Making the bank comfortable that checks, balances, processes and procedures are in place will be beneficial in terms of loan amount and the best rate available. Lenders want to be sure the organization has a well-run business office with proper accounting and financial systems in place with appropriate controls and best practices. This will help in the preparation of financial statements, capital campaign information and treasury management reports, as well as guard against possible embezzlement or fraud.
Developing comprehensive business practices will improve the business office and the quality of information. Quality financial statements will keep the church above reproach and should be considered a best practice. When requesting financing, it benefits the organization if the lender knows it is an important part of your stewardship responsibility.
Have at least three months of operating cash reserves on hand. In lending through the Recession, one positive factor that clearly determined strong leadership and the sustainability of the ministry was adequate cash on hand. Those churches that maintained appropriate liquidity were able to manage through the tough cycle while not severely cutting back on staff or ministry and outreach programs. Strong cash reserves also made the church a stronger borrower; in turn, this presented these churches as a lower risk, so they were able to secure a lower rate.
Refinancing and / or increasing your debt now provides not only the opportunity to fix or lower your interest rate, but also to consider other important initiatives — building projects to expand program development and community outreach, for example.
While doing the necessary preparation and due diligence to be a good bank prospect requires effort, it is well worth the time. A lower rate and the right financial partner will support the vision of your church and put you in relationship with a lender you can trust through the expected and unexpected challenges of every ministry.
Therese DeGroot has developed and managed religious lending programs for 25 years for many banks that now specialize in lending to churches, nonprofits and schools. She is Managing Director of First Bank’s Community First Financial Resources Division in Lake Forest, CA.