By Stephen Anderson
Churches today face their most significant challenge in obtaining financing for building programs since Jimmy Carter was president and interest rates hit 22 percent. Today, even churches with long histories of good relationships with their lender are surprised and dismayed by the difficulty, and sometimes impossibility, of getting the financing they need. What they are experiencing is the new church lending paradigm that has come into effect since the economic crisis began in late 2008.
Intellectually, church leaders understand lending has become more difficult, but most do not understand how much church lending has fundamentally changed since the fall of 2008. They are therefore unprepared when they approach the lender.
The reasons or justifications as to why many lenders no longer make church loans are unimportant, as the effect is the same — fewer places to find money with which to build. For those lenders still lending to churches, the old lending rules which churches have come to understand and expect are essentially out the window, having been replaced by fewer sources of money, a greatly increased level of documentation, much stricter underwriting criteria and reduced lending amounts.
Two fundamental requirements
Today when a church applies for a loan, it needs to be able to demonstrate two important qualifications: a history of retained income in excess of the loan amount, and sufficient cash to bridge the gap between the loan amount and the project cost. If the church approaches a lender with financial reports that do not demonstrate these two fundamental requirements, they are almost guaranteed not to get funded.
Church lenders require more paperwork and detailed financial documentation in order to approve a loan than ever before. Before the lender approves a construction loan, they will need to see how the church will bridge the gap between the loan amount (typically only 65-70 percent of the project) and the total project cost. The lender will also want to see a history of retained income that is 100-120 percent of the anticipated mortgage payment. For a church contemplating a $1 million building budget, this means the church will need to show $300,000 or more in cash, plus at least a six -12 month history of retained income greater than the anticipated mortgage payment.
Financially, the majority of churches do not systematically prepare for a building program. Most do not have either 30-40 percent of the building program cost in cash, or even a plan already underway to raise the cash. The vast majority of churches operate with what may be referred to as a “zero sum” budget, in that they typically spend everything they receive. Unfortunately a zero sum budget does not leave room for a mortgage.
History of cash flow
Unfortunately, for the churches that have received a rude awakening from a lender, there is perhaps little that can be done in the short term except begin to take the steps to improve the ability to become financed. It takes time to accumulate cash and the lender will want to see a history of positive cash flow at least as great as the payment on the mortgage, so there are no quick fixes. The remedy for these churches is to implement a financial strategy to become prepared to build, improve net cash flow, and accumulate cash. Ideally the church will apply these strategies at least a year before they approach a lender.
To increase cash flow, the church has only three options: reduce expenses, increase giving, or a combination of the above. The first thing that any church can do is to immediately begin to reduce expenses. As a past treasurer of my church I can attest this is neither easy nor fun, but it is doable. This is a wonderful time to objectively evaluate what expenditures are producing fruit in keeping with the vision and mission of the church and cut those that are not productive. However, spreading small reductions across the board may be more palatable than completely eliminating some areas of expense.
Increasing giving is a bit more complex, but will almost always result in more of a net improvement than cutting expenses. Those churches which will teach and preach on biblical giving in clear and unequivocal terms and exhort and challenge their people to action, will see dramatic increases in giving. Achieving increases in giving of 10-30 percent in a matter of just a few weeks is very possible with the right stewardship program. As the church reduces expenses and increases giving, that money should to be put into the building fund to address both the issues of cash on hand and demonstrate adequate cash flow with which to service debt.
In addition to the tactical solutions above, an important strategy to implement is a capital campaign. Even in these difficult economic times, for most churches a capital campaign should raise between one and three times the church’s current annual income over a three year giving period, and receive 40-45 percent of the campaign gifts and pledges in the first year. In addition to raising significant amounts of cash in a relatively short time, a capital campaign is also a great way to build excitement and spiritual growth in the congregation.
Regardless of whether the lender visit is in your past, or your future, you need to find a way to cut expenses and almost certainly increase giving.
Stephen Anderson is the founder and principal church building and capital campaign consultant for AMI Church Consulting, Clayton, NC. [ www.amiccs.com]