By Mark Winterroth
A few years ago, I encountered an all-too-familiar problem with a church client: It was using cash reserves to supplement decreasing tithes and offerings. Although the church’s payments to its lender were “timely,” it was simply borrowing from itself.
When processing a loan request or conducting a review of an existing loan, banks evaluate an organization’s ability to service debt from normal operating activities. Unfortunately for some churches, this isn’t a point of focus — but it should be. Each bank might differ in its formula, but the bottom line remains the same: Is there sufficient operating cash flow available to service debt?
Before touching its capital reserves, a church should carefully examine its current financial condition and explore areas that could yield considerable benefits.
It’s time to dust off the loan file.
Refinance existing debt
In speaking with administrators, I’m often amazed at how managing such a large expense is overlooked when cash gets tight. Paying an unnecessary mortgage expense can quickly erode even the best-planned budget.
First, we need to debunk the myths:
- “We can’t refinance until our loan matures.”
- “We have a prepayment penalty.”
- “We already have a good rate.”
The truth is this: On the surface, it might appear unwise to pay a penalty or even refinance a decent rate; but, there might be a larger picture to consider.
Suppose a church has mortgage debt of $5 million at 5.25 percent, a prepayment penalty of $30,000, and two years until expiration. By taking advantage of today’s current rates in the 3.75-percent range, the borrower could save nearly $75,000 in annual interest expense — just within the first year alone. That’s almost $375,000 over a five-year period! (Note that all savings are based on a hypothetical example, and that actual savings might vary depending on the loan amount, interest rate and other applicable fees.)
Based on this example, the church actually frees up additional ministry dollars and improves cash flow — all without asking its members for even one extra dollar.
Automated Clearing House (ACH) transactions can provide a valuable solution during low attendance or cyclical giving periods. Upon securing authorization from the donor, ministries can execute an ACH directly from their desktop and process transactions as a “one-time” gift or as recurring donations. ACH giving is safe, secure and typically less expensive than processing a physical check.
Also, as the clearing process for a check may take three days or more, ACH transactions can greatly reduce float time. As giving patterns fluctuate during slower months, churches that encourage ACH giving can see greater and more consistent giving levels.
Unlike a credit card, a purchasing card is typically interest-free if the balance is paid monthly. Cards can be issued to administrators and staff members, with customized spending limits for each individual. By using a card for basic items such as office expenses, supplies, travel and even utilities, a church can retain cash balances longer — often, up to 55 days. The resulting higher average deposit account balances and increased earnings credits can be used to reduce or even eliminate account fees. As an added bonus, many cards also offer rewards and/or rebate programs.
As mindful stewards, church administrators should explore every opportunity to maximize funds for their ministry.
Mark Winterroth is vice president and relationship manager in the Religious Institution Division at San Francisco-based Bank of the West.