Show me the money! Borrowing-capacity tips for churches

Before you talk with any lending group, your church will need to fully understand the ups and downs of its last three years of financial statements. Church lenders will always focus on undesignated income, cash flow, debt and equity trends. 
The first thing churches really want to know, however, is their borrowing capacity.

Gerald R. James, Jr.
President / CEO
BCLC Church Lending

Determining this capacity isn’t that complicated

The simplest approach is multiplying last year’s annual undesignated income by three. For example, if a church multiplies its $100,000 in annual undesignated income x 3, then that church could possibly borrow up to $300,000.

Here’s another borrowing capacity ratio that will help you out. First of all, make sure that your church’s loan payments do not exceed 25% of your annual undesignated receipts. A $300,000 loan — at a five-year fixed rate of 4.25%, with a 20-year amortization — has an annual debt service of $22,292, or 22% of annual undesignated receipts.

If you keep the debt payments under 25%, you should have sufficient income, assuming your remaining expenses don’t get out of line with your church’s budget.

What’s in your budget?

As we all know, Coronavirus caused some churches to struggle financially during the last three years. However, most of the mission-minded churches we serve generated increases in undesignated receipts and cash flow. Most of these mission-minded churches continued to support their local ministries throughout the pandemic. During this time period, they also paid down their debt at an accelerated pace. 

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Mission-minded churches and mission minded lenders can accomplish a lot.

There are many ways to break down a church budget. The most efficient way to make sure your church is financially healthy is with a Fixed Expense Ratio. Simply divide annual undesignated receipts by salaries, projected debt payments and utility expenses. For example, let’s say that a church has annual undesignated receipts of $100,000. Salaries — plus debt payments and utilities — should not exceed 75% to 80% of undesignated receipts.

Before you fall in love with the interest rate, make sure you understand the closing costs and the terms of your future loan.

The reason the Fixed Expense Ratio is so important to your church is because it allows room in the budget to help other ministries. As mentioned earlier, churches that are committed to supporting ministries are generally healthier than churches that aren’t mission-minded. The primary reason for this is because your strong tithers really like to financially support your ministries.

How important is the interest rate?

One of the most-asked questions by churches seeking loan funds is, What’s the interest rate? Most church lenders and banks base their interest rates on the cash flow and equity of the church. Cash flow provides the funds necessary to service the debt, and equity allows the lender to sleep better. Stronger churches sometimes have lower interest rates than financially challenged churches.

Before you fall in love with the interest rate, make sure you understand the closing costs and the terms of your future loan. Closing costs include title work, legal fees, survey, appraisal, and an origination fee from the lenders. Most of the time, your lending source will expect your church to pay most of the closing costs. On some occasions, they will pay for a portion of the expenses. Make sure your lender provides an estimate of closing costs before your church signs anything.

Should your church accelerate debt reduction?

Debt reduction is a great way to create more room in your budget for future building projects. If your church isn’t interested in any future building projects, most lenders will allow you to amortize your debt up to 20 years. 

Whether your church reduces its debt or not, it is always wise for churches to designate funds for repairs and maintenance. In our practice, the average loan payoff for church lending portfolios is eight years.

Before you seek a loan, be sure to keep all these borrowing-capacity tips in mind. It’s just good stewardship.


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