Loans can be a useful tool in stewarding your church’s financial resources, but when taken on without due consideration they can prove stifling. What makes a bad loan? How can your church take on debt without enslaving yourself to the lender? What do you need to borrow wisely? The following sections should give you some things to consider.
Borrowing can be a touchy subject among Christians—there are verses throughout the Bible that speak about the pitfalls of borrowing money (for example, Proverbs 22:7, 26-27; Exodus 22:25-27). Money in general is described as “a root of all kinds of evil” (1 Timothy 6:10) and we are warned to avoid serving it or prioritizing its pursuit. However, there are no Scriptures to forbid Christians from borrowing wisely, nor any that suggest it’s a sin to do so.
Even secular culture acknowledges that many kinds of debt are bad for individuals—for example, credit card debt or payday loans, which are based in spending more money than you have. However, some kinds of debt are good—like mortgages or student loan debt, which provide a future benefit when undertaken in proportion to the value of the product. This is doubly true for churches. Any loans that do not add value to the ministry or cannot reasonably pay off in a timely fashion should be avoided.
However, debt can also be a useful tool when used to grow assets, even for churches who desire to be good stewards of their financial resources. A mortgage or line of credit to build or renovate a building may put your church in a better position long-term by expanding the scope of ministry you can provide. If so, it can be considered “good debt”.
When wisely undertaken, borrowing can give your church more capacity to serve God’s kingdom. The important question to ask regarding a potential loan is: what are the long-term benefits of this debt? Will it put us in a better financial position in the future without negatively impacting our financial position now?
No. Even if you can borrow, it might not be wise to do so. It’s important that you not take on debt you can’t afford to repay. Before borrowing, examine your church’s financial position to see if you will be able to maintain the loan payments in a variety of circumstances. Here are some questions to consider:
- Is there room in our budget to pay the new mortgage, utilities, and maintenance costs?
- Do we have an emergency fund of at least three months’ worth of expenses to help offset short-term issues?
- Do we have at least 20% of the project costs in cash, either in hand or in pledges?
- Will we be able to make necessary adjustments if giving declines 5%? 10%? 15%?
- Is our congregation committed to paying off the amount of debt we’re considering?
Equity, sometimes called net assets for non-profit organizations, is an accounting term generally defined using the following equation: Equity = Assets – Liabilities.
Any resource your church has—land, buildings, giving funds, money in a Building Fund, etc.—qualifies as an asset. Liabilities are what you owe—whether that’s outstanding debt, the church’s payroll, or pledged funds for missionaries. Subtract the liabilities from the assets, and you’ll see what your equity is.
Equity is the value of one’s assets minus liabilities. This means ALL assets—so, if a church has a building worth $1million and owes $500 thousand on the building, their equity is $500 thousand. If a church owns a building worth $1 million and owes $500 thousand but also has a building fund worth $300 thousand, their equity is $800 thousand.
Even if you take funds out of your general fund and put them into another fund earmarked for a specific purpose, those are still your funds and they still are included in your assets. It’s not a negative amount because you still hold those assets. Or, say, you have money and then you buy a van outright. The equity doesn’t change because you hold the same amount of value in resources.
Different kinds of assets behave differently over time. Cash assets may go down in buying power due to inflation, but $100 thousand left untouched in a bank account for ten years will still be at least $100 thousand. Real estate, however, depreciates over time, which means that the worth of the asset decreases. The depreciation rate can be calculated several different ways, but all are based on the difference between the value of the property when new and the value of the property at the end of its useful life. For a building, this is generally about twenty-five years.
When you are calculating the value of your assets, you need to include depreciation. A building purchased for $1 million twelve years ago will have depreciated by almost half, so the value of that asset is now much closer to $500 thousand. If it underwent a $200 thousand renovation at year ten, the asset value is not $1.2 million, but around $700 thousand. It’s important to note that only physical structures depreciate in value; any land you own does not.
Be aware of depreciation to understand the true value of your assets.
When deciding whether a church qualifies for a loan, one of the things lenders look at is a church’s equity to understand how the church has managed their finances in the past. If a church’s current liabilities already eat up the majority of its current assets—making its equity low—the likelihood that it can afford more debt is equally low, and the chances of that church getting approved for a loan is lower then a church that would have higher equity.
Lenders look at equity, among other things, when assessing if a church can qualify for a loan. Every lender uses its own benchmark, but at Church Investors Fund, we require a minimum of a 20%-30% down payment (equity) when funding a new purchase or construction project.
Questions to Ask
Lenders ask for several years’ worth of financial statements to prove that the church is in a good financial position—although that doesn’t necessarily signify a certain amount of income! When lenders look at financial statements, they want to see:
- That the church has sufficient cash flow to afford the payments
- That the church’s income level is sufficient to support the loan (see “Do we have enough room in the budget?” for a fuller explanation)
- That the assets, liabilities, income, and expenses are clearly categorized.
When buying a building, there are two types of financial responsibilities you’ll need to consider. One is the initial down payment and closing costs; the second is the ongoing expense of owning a building. Building funds are great tools for down payments or initial renovation costs, but since loans are amortized between 10-25 years you need consistent cash flow to make your payments well into the future. When getting a loan, you’ll be required to demonstrate the capacity to make consistent payments.
If your church is running a surplus (your income is greater than your expenses) you may be able to make payments on the loan out of the extra income. However, do not plan to use all of the surplus for payments. Leave room for fluctuations in income and consider what will happen if that excess income goes away.
Another way to make room is to consider which expenses will go away when you complete your acquisition or project, as that cash flow can now be directed to making payments. For example, churches may have to rent an office for their staff, a school for Sunday services, and a commercial building for weekly gatherings. If the church buys a building that can house all those activities, the amount previously paid for rent can be used for loan payments.
Lenders will not fund the full cost of a project; you can expect that you will be required to furnish between 20–30% of the project costs. A capital campaign can be a good way to raise these funds, especially since pledges will often be taken into consideration as part of your assets. Additionally, capital campaigns help the congregation actively participate in the building project.
Generally, servicing your debt payments should take up no more than 35% of your budget, and preferably less. If it will be more, it’s best to borrow less or, if that’s not possible, wait until you are in a stronger financial position.
Giving and tithes generally make up the bulk of a church’s income, which means that your income can fluctuate for any number of reasons. Loan payments, however, remain constant. To ensure you are prepared for unexpected changes in giving, it’s best practice to have an emergency or reserve fund available with enough cash to make loan payments for three months. This usually allows enough time for giving to return to normal, or for a church to make other adjustments if necessary.
Help! (Example Stories)
While the information that is needed for each loan varies case by case, a church can expect to provide at least the following to the lender when applying for a loan:
- An appraisal of the proposed collateral that indicates it is of sufficient value;
- Financial statements for the last 3-5 years;
- Information about current cash assets, investments, etc.;
- A description of the purchase/project and an estimate of its total cost;
- their Articles of Incorporation, Bylaws, and proof that they are a legal entity with the state;
- 20-30% of the project costs.
A church rents an elementary school for Sunday services and office space for the staff during the week. The two properties together cost $6,000 per month. They’ve managed to save $200,000 toward buying a building of their own, but since rent in their area keeps rising and their budget is already tight, they can’t afford to buy anything outright that will meet their needs. Then they learn that a great building right in the middle of their ministry area will be coming up for sale. Unfortunately, it’s listed at $1 million—way more than they can raise, even with their growing congregation.
While praying about the building, the church realizes that it’s is in good enough condition that they could move in right away, even if they would eventually want to do some renovations. If they do that, their monthly rent cost will go away, freeing up $6,000 every month. That gives them capacity to make payments on a loan. Using their saved $200,000 to make a down payment and pay the closing costs (which are usually between 1 and 1.5% of the transaction), the church borrows $800,000 to purchase the building. And, since their loan payment is less than the amount they used to pay in rent, they are able to make extra principal payments and pay off the whole loan in sixteen years instead of the expected twenty-five.
It’s November, and the thirty-year-old boiler blows out in the middle of an overnight snowstorm. The church knew they would have to replace it soon and has been saving, but when they look into new boilers they find out that building codes have changed and now they’re going to have to put in a whole new heating system. Their savings won’t cover that, even if the total cost is only on the low end of the contractor’s appraisal—and he’s not sure what he’s going to find when he gets into the walls. The church knows it can’t wait very long to fix the issue, but they don’t have the funds available now when they need them.
The church applies for a Line of Credit loan. With this kind of loan, they can borrow money throughout the contractor’s work to pay costs as they come up and not before. This means that the church will only borrow as much as it needs, often ending in a smaller loan. Additionally, with a Church Investors Fund Line of Credit loan, the church will only pay interest for the first year of the loan, giving them time to save to make full payments once the project is done.
After a sudden influx of young families into their area and congregation, a church finds itself bursting at the seams! Its building has done good, faithful work for thirty years, but it just doesn’t have the kind of classroom space the rapidly expanding children’s ministry requires to serve the families of the community well. After much prayerful consideration, the Building Committee determines that the best way to proceed will be to remodel the current property, including building brand-new education space off the east side of the current building. They take bids from several contractors and decide to present a building plan that will cost $800,000 to complete.
The church elders then must consider if and how the church will be able to pay for the addition. First, they calculate that the most a lender would be able to lend for an $800,000 project would be $640,000 (80%), leaving the church to pay $160,000 from their own coffers. The church has a small building fund that holds about $50,000 in reserve for necessary repairs. They decide to begin a capital campaign with a goal to raise $200,000 within two years.
Next, the elders look at their most recent financial statements to see what kind of equity the church has, specifically how much equity they have in their building. They know if they aren’t able to put up collateral for the amount of the potential loan, they probably won’t be able to get a loan at all. The building is old, but since the church owns the land and the addition will add substantially to the property value, it could easily get at least $800,000 if they had to sell it.
They also look at the budget to see if they would be able to facilitate loan payments, using an amortization calculator to estimate how much payments would be per month. Based on their estimated giving trends and the fact that they have a budget surplus at present, they feel confident that they will be able to make regular payments without choking other ministries or skimping their staff.
Unfortunately, when they look at their income, they run into a problem. They know that lenders prefer lending to a church with a debt-to-income ratio of less than 35%. While they don’t have any long-term debt at present, taking on a $640,000 debt at their current income would exceed this ratio, making the loan amount a stretch. With that in mind, the church decides to increase their capital campaign to $350,000. Wisely expecting that some pledges will not materialize, the elders decide they can afford a $500,000 loan.