For the well-positioned church, now is a great time to borrow

By Marianne Berlan

The vast majority of banks have emerged from one of the most difficult periods in recent history somewhat battered and bruised, but fundamentally sound. Banks have plenty of capital to lend to credit worthy borrowers. For churches, credit worthiness is highly correlated to the “right size” of a new building project. In the past few years, historical norms for prudent loan amounts were set aside by both lenders and borrowers, with disastrous results.

Banks and churches alike need to refocus now on long established metrics regarding appropriate loan amounts. Churches that are planning expansion projects based on what they can afford based on historical results versus what they hope to be able to afford in the future will find a number of lenders willing to provide financing.

Appropriate debt level

What is the appropriate level of debt for a church? The answer lies in the past. In order to determine an appropriate level of debt one needs to review the church’s revenue and cash flow (amounts and trends) over the previous three years. An experienced church lender will arrive at an appropriate level of debt based on multiples of revenue and historical levels of cash available for debt service, among other factors.

As an example of a common scenario, if a church’s tithes and offerings were $2 million in each of the last three years and are on pace to reach that in 2010, it would appear that church attendance is at capacity. In this example, the church might be offering two or three weekend services, with the primary services filled to capacity most of the time. This would support the church’s contention that it needs to build a larger sanctuary in order to grow its congregation.

Based on the income numbers alone, this church may qualify for $5 to $6 million of total debt. However, the answer to how much debt the church can borrow hinges on an analysis of the church’s historical cash flow and of any recently started or planned capital campaign.


If this church has collected $2 million in each of the last three years but has spent 95 percent of its income on salaries, operating expenses and programs, the church won’t be able to demonstrate that it has historically generated the net cash flow it will need to service the new debt.

It would be unreasonable to expect that the church would cut staff and other costs when they are expanding. When planning new building projects churches need to start budgeting and reserving for future debt service a year or so before they plan to borrow. Otherwise, churches are essentially betting on an unforeseen future event to fund their new debt service requirements.

Capital campaign

The exception is when a church has recently started, or plans to start, a professionally orchestrated capital stewardship campaign. Experienced church lenders know that professional campaigns generally produce anticipatable results. It is reasonable for a church to look to a capital campaign to bridge the gap between what they could afford based on historical basis and what it will take to service the post-campaign indebtedness.

One of the key considerations is whether the proceeds from the campaign will be sufficient to pre-pay a portion of the loan to a level that historical cash flow could support. In other words, a capital campaign can pump up a church’s borrowing capacity for the near term but should not be relied upon for long-term debt service. Churches are typically not able to rely on donations expected in future capital campaigns to support debt service unless there has been a history of back-to-back campaigns during times with no expansion.

Experienced church lenders will want to see the results of the first few months of a capital campaign. They will also look at pre-pledge giving per attendee. If church members have been giving at a high sustained rate based on geographic and demographic factors, the lenders assumption regarding the likelihood of a 100 percent pledge collection rate may be impacted. Well established church lenders may have guidelines regarding giving per attendee.

If churches take a conservative approach to how much they can afford to build, they should have no trouble finding a lender. Further, interest rates are again near historic lows so now is an excellent time to consider expansion. Banks have capital to lend and would be only too happy to see their funds put to good use.

Some banks offer 10-year fixed rate loans at very low interest rates. It would be worthwhile for many churches to refinance their existing debt in order to lock in a new 10-year fixed rate now, rather than waiting a few years until the loan matures, by which time rates are likely to be much higher. For the appropriately positioned church, now is an optimal time to borrow for expansion or refinance. A prudent church lender will be in the market and ready to help.

Marianne Berlan is VP Church Banking Analyst, Church Banking Division, Bank of the West, Walnut Creek, CA.


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