The Rules of the Game Have Changed

That’s never been truer than for the way churches finance capital expenditures today. Gone are the days when you could talk to your local banker and they would bend over backwards to make the loan work. Money is cheap but lending is tight. Capital remains constricted and there is reluctance on the part of many lending institutions to step out when they already have so many under-collateralized commercial loans. Cash is still king but cash flow is the emperor. Banks no longer rely on the pledge of funds and are requiring churches to have a 6 to 12 month history demonstrating the receipts of those pledges. And banks no longer assume the appreciation of real estate values so the Loan-to-Value Ratio (LTV) is more critical and will not likely be able to exceed 75%.

So what changes do churches need to secure the capital they need for expansion? Here are some key strategies financing under the new rules of the game:

1) Be clear: There has never been a more important time than now for churches to have clarity about their vision. The vision and mission must drive the decision as to whether or not new facilities are necessary.

2) Plan ahead: Begin now to develop margin between your income and expenses so you can demonstrate actual ability to carry debt. Even expenses you’re carrying now that you won’t need later can help. For instance, if you’re paying rent on facilities you won’t need when your new facilities are completed, that money can be used to amortize your new loan. NOTHING beats building for cash when you think far enough ahead.

3) Start early: Banks used to be impressed by what was pledged. Now they want to have six to twelve months evidence of the commitments so capital campaigns need to start earlier in the process.

4) Be prudent: It’s important to work with professionals that have adequate experience in serving churches. Missteps can be fatal to a building program. We continue to see projects abandoned because a church trusted a price from a builder or architect that turned out to be too low. At best it put them back to square one; at worst it killed the project and left lingering costs.

5) Consider alternatives: We are seeing an increase in churches funding their needs through bond programs. Bonds often carry higher initial fees but are less expensive for the life of the loan. Consider these and other alternatives for the one that best fit your comprehensive financial plan.

Money is not likely to ever be this cheap so it can be a great time to finance a building program. Use these strategies to move ahead successfully.