Before a building or renovation project, church leaders should understand borrowing capacity — and why speaking with a direct lender matters.
By Dan Mikes
Executive Vice President & Director
Faith Based Banking Division
Cass Commercial Bank
Scripture calls church leaders to demonstrate faithful stewardship. Today, that includes navigating budget constraints, as well as evolving giving habits and complex financial decisions.
One of those financial decisions is whether or not to incur debt — and if so, how much debt is appropriate, and which voices to take counsel from.
Altogether, these might be the most impactful financial questions your ministry might ever answer.
If your church is considering borrowing to acquire, build or renovate a facility, a simple Google search will yield the names of numerous organizations. All will be happy to talk with you about your ministry’s borrowing capacity. As you move forward with these discussions, it is highly advisable to begin your planning process with a borrowing-capacity discussion so that your leadership team, as well as your architect or realtor, will have a realistic sense of what is achievable.
However, one word of caution…
Nearly half of the names that come up on that Google search will be facilitators or consultants, not direct lenders. This has become more common in recent years. You might have used a loan broker when you secured a highly standardized mortgage for your home, but church lending is more nuanced.
For this reason, you will find it far more beneficial to open a dialogue with a direct lender and, in so doing, avoid the additional expense of the intermediary. A direct lender with a long-standing history of lending to churches can promptly identify your borrowing capacity and explain how that threshold is calculated.
Why talk to a direct lender rather than a broker?
Banking regulators require banks to monitor their commercial loan portfolios. If a church falls on hard times, there is communication between the bank and borrower. This interaction with the borrower — and the underlying circumstances — provides the direct lender with a much deeper understanding of the consequences of borrowing decisions and the impact of church management’s choices.
In contrast, a loan consultant typically does not review the borrower’s financial outcomes on an annual, ongoing basis or maintain a close relationship with the borrower through the life of the loan. Consequently, the deepest insights and the best consultation will come from a direct lender with a long history of church lending.
Understand the financial structure behind church loans
As you set out to identify direct lenders to speak with, it’s important to know there are primarily two types of direct church lenders: first, banks and second, non-banks or foundations. From the 40,000-foot level, both types of institutions essentially do the same thing: take deposits from depositors or investors and use that money to make loans to churches.
But it’s important to understand the relationship between the deposit-gathering function and the interest rate which the lender will charge a borrower. Depositors and investors make decisions along a risk-return spectrum, balancing safety, liquidity and yield. When you put your money in a bank, you take very little risk, courtesy of the loss-insurance provided by the government via the Federal Deposit Insurance Corporation (FDIC). Insured Cash Sweep (ICS) and the Certificate of Deposit Account Registry Service (CDARS) enable FDIC coverage on balances in the tens of millions of dollars through just one bank relationship. Consequently, if you prioritize this level of safety above securing the highest yield when making an investment decision, you might be more inclined to place your money in a bank rather than invest your funds in a foundation, where the yield might be higher — but there is no deposit insurance.
Why drift off-topic and talk about deposits?
Because the rate of interest which the institution pays to its depositors directly correlates to the interest rate the institution charges a borrower for a loan. The interest income from the institution’s loan portfolio needs to be sufficient to cover the operating margins and to pay interest to the depositors. If the yield paid to the depositors is lower, the interest rate the institution charges the borrower can also be lower.
In contrast, if a foundation has to pay a higher rate of interest to its investors to compensate for the risks associated with not having insurance, it stands to reason the foundation might need to charge a higher interest rate on its loans.
Notwithstanding the above, if there is one thing I have learned across my 35 years and $5.5 billion in loans to churches, it is this: in the long run, a good relationship with a trusted institution is more important than a slightly lower interest rate. Above all else, as a church leader, it is wise to select a lender with an established reputation for partnering with churches to help them grow and to build the kingdom.
There are many voices you can listen to when seeking counsel regarding borrowing capacity and loan terms. You’ll be best served by institutions with deep, direct experience and a lower-cost means of funding your vision.
Dan Mikes is Executive VP/National Manager, Faith-Based Banking Division at Cass Commercial Bank.
