By Therese DeGroot
Considering a new loan, or refinancing an existing one? Here’s what you need to know.
Right now, long-term interest rates continue to be low. So, many church leaders are wondering if it’s a good time to refinance existing debt or apply for a loan to undertake important building projects. From my perspective, it makes good sense in the current economic environment.
The most important factors to consider regarding loan refinancing are (1) the current interest rate on the existing loan, and (2) how much money (if any) will be saved by refinancing to a lower rate once the costs incurred by refinancing are added in.
Refinancing should absolutely be considered now — while fixed rates are still low — to fix a floating or adjustable rate loan. Securing a fixed-rate loan enables proactive budgeting, predictable cash flow and debt service. It also ensures that ministry and outreach programs will continue to be funded and expanded.
Refinancing almost always makes sense when the proposed fixed rate is 1 percent lower than the current fixed rate — and most certainly if a church needs additional funds for a building, renovation or remodeling project. If the project will expand sanctuary seating or increase much-needed parking, improve child care facilities, or enlarge the fellowship area to encourage increased attendance, then the project should certainly be considered.
Thought should also be given to projects that will update and improve facilities, as well as the overall impact the project will have on the church’s ability to reach out to the community.
Equally important in this process is finding a financial partner who’s experienced in religious lending, committed to the market and financially stable. It’s critical to find a financial institution that understands the unique nature of how religious organizations operate and is well-capitalized and liquid.
Otherwise, the loan might be structured as a real estate loan and not be mindful of the cash flow nature of churches. This can result in a loan that’s too large for the congregation to service debt or too small to build out the vision, resulting in covenants which are either too restrictive or irrelevant for a church, or perhaps an interest rate that’s higher than it should be based on a perceived high level of risk.
Best foot forward
In preparing the loan request package, presentation is everything. A well-organized, professional and thorough loan package — one which represents how important the church considers its stewardship responsibilities to be — is critical. The better the quality of the church’s information, the more successful it will be in securing the best financing available.
To foster lender confidence and secure the best possible pricing, a church must make the lender feel confident that checks, balances, process and procedures are in place. Lenders want to be sure the organization has proper accounting and financial reporting systems in place, accompanied by appropriate controls to guard against possible embezzlement or fraud. As a best practice, quality financial statements should be kept and shared with the lender to keep the church’s financial condition transparent. When requesting financing, it helps if the lender knows this is an important part of the church’s stewardship responsibility.
Financing for construction
When financing is needed for a building project, a building plan and budget should be developed and submitted to ensure the project can be funded and completed on time and on budget. The budget shouldn’t exceed total loan proceeds and cash on hand.
One option is to break down large building projects into smaller phases. In other words, the church might consider building only what the congregation can afford while continuing to grow ministry and outreach programs. A church should avoid overburdening its congregation with too much debt, which stalls growth as funds are redirected to debt service and away from programs.
An important part of any building plan is a fundraising campaign to let the congregation participate — even for small projects. Doing so not only minimizes the amount of debt required to complete the project, but it engages the congregation in the process.
If the vision is compelling, people will give to expand it; they won’t give just to build a building. Restating the vision and presenting a well-crafted case (with a call-to-action) will provide a solid starting point. Program development should be incorporated into fundraising initiatives, as well as into financial and community outreach goals.
Refinancing or increasing a church’s debt now provides not only the opportunity to fix and lower the interest rate, but also to consider other important initiatives — building projects to expand program development and community outreach, for example.
Doing the necessary prep work and due diligence to determine if refinancing is a cost-effective option requires effort, but it’s worth it. A lower rate and the right financial partner will support a church’s vision. It will also establish a relationship with a lender the church can trust through the expected — and unexpected —
challenges it faces.
For 25 years, Therese DeGroot has developed and managed religious lending programs for numerous banks which 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.