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Church Financing Choices - Church Loan Strategies

By: Stephen A. Bush A church loan is likely to be the most difficult type of business loan to complete successfully. Since churches are an integral part of local community infrastructures, it is important to explore all church financing options. A typical church loan will require strategies involving unique commercial real estate financing that is not easy to locate.

Churches are not typical commercial enterprises but they do have substantial business financing requirements. This article will offer an overview of four key church loan financing difficulties and a listing of six practical church financing strategies.

Four Key Church Loan Problems

Before addressing possible solutions for the most common church loan needs, it is important to discuss the typical barriers to obtaining church loans. Historically church financing has been difficult to arrange for several reasons:

(1) Church Loan Obstacle Number One: Churches are usually extremely unique. Because of this, typical commercial lenders are concerned that if commercial mortgage payments are not maintained, it will be difficult to sell the property due to unique property aspects.

(2) Church Loan Financing Barrier Number Two: Business lenders often request private guarantors for church loan financing, and this is not appropriate for church loans. The legal and financial structure of churches simply does not work with a traditional lender/guarantor requirement. Most business lenders will not accept the lack of private guarantors due to the earlier point about challenges involved in reselling the church property.

As a result, it is common to find that church loans have been obtained only after one or more church members have provided a personal guarantee for a church loan. The requirement for personal guarantors acts as a severe obstacle because church members might be unwilling to act in this capacity and because there simply might not be individuals who have sufficient net worth to provide a personal guarantee for a large church loan.

(3) Church Financing Difficulty Number Three: When church financing is obtained, there are frequently unacceptable terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the church loan being declined, and if the terms are accepted, the church is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.

(4) Church Financing Difficulty Number Four: Construction, renovation and land acquisition are even more difficult for churches to finance than purchases or refinancing. As a result, needed repairs are often postponed indefinitely and new churches frequently take many years to become a reality.

Six Prudent Church Loan Financing Approaches

There are common-sense financing solutions for the church loan issues described above. Here is an overview of church financing that is now available from some non-traditional lenders:

(1) Church Financing Solution Number One: Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender. This particular church loan solution means that lender decisions will not be based on personal guarantors in any way.

(2) Church Loan Financing Approach Number Two: Long-term business loans. Church financing will produce more effective financial results for the church when it is long-term because payments will typically be substantially decreased.

(3) Church Loan Financing Approach Number Three: Low interest rates. Many churches have been charged excessive interest rates because they did not realize what other financial options they might have.

With payments based upon a rate in the range of prime plus 1%, church loan payments will be reduced dramatically. In combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements.

(4) Church Loan Financing Approach Number Four: Church loan financing minimum of $500,000. This larger loan size permits a church to finalize church financing in one step.

(5) Church Loan Strategy Number Five: A Higher LTV (up to 85% is routinely doable). This results in a more reasonable amount of 15% or slightly more (rather than 40% to 50% possibilities with many church loan financing alternatives) for the church to provide.

(6) Church Loan Strategy Number Six: Church loan financing possibilities should include purchase, refinancing, new construction, renovation and land acquisition. With comprehensive church financing, it will not be necessary to postpone critical church loan financing requirements.

The six church loan approaches described should benefit most churches by facilitating the new church construction on an accelerated timetable and allowing refinancing with better church financing conditions. The six church loan financing approaches should result in financial covenants that will contribute to the long-term financial profile of prudent churches which adhere to the church financing approaches suggested.

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