Church Loan Problems - Church Financing Solutions

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 Major Church Financing Difficulties

Prior to describing alternative approaches for typical church loan financing requirements, it is important to discuss the typical church financing obstacles. Church loans have historically been difficult to arrange because of several key issues:

(1) Church Loan Financing Barrier Number One: Most church properties are unique in comparison to other commercial properties. Due to this, church lenders are likely to be concerned that if business loan payments are not made as agreed, it will be a challenge to find a new owner interested in the unique property attributes.

(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.

It is not unusual to have a church loan that has been finalized only after several church members have given a private guarantee for church loan financing. The normal request for private guarantors acts as a major difficulty because there might not be individuals who have the necessary net worth to provide a private guarantee for large church loan financing requirements and because church members might prefer not to act in this capacity even if they are financially capable of doing so.

(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 Loan Strategy Number One: Non-Recourse Church Financing (to replace private guarantors). The ability to not request private guarantors routinely requires a non-traditional commercial lender. With this church loan financing strategy, church financing will be independent of private guarantors.

(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 Financing Solution Number Three: Low interest rates (usually a maximum of prime plus 1%). In reality many churches have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options.

With payments limited to prime plus 1% or less, church financing payments will be noticeably reduced. Together with a longer-term church loan, the overall payment decrease will improve church cash flow.

(4) Church Loan Strategy Number Four: Minimum church financing set at $500,000. This encourages churches to finish most business financing in one stage.

(5) Church Loan Financing Approach Number Five: Higher LTV (75%-85% is possible). This produces a realistic amount of 15% or so (compared to 50% scenarios with much church financing) for the non-financed portion in refinancing or purchase down payment.

(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.

Collectively the six church financing solutions described above should benefit a large number of churches by allowing refinancing with much better financial terms and by facilitating the construction of new churches on an accelerated timetable. The six church financing solutions are likely to result in improved financial terms that are conducive to the long-term financial health of the churches which take advantage of these suggested church loan solutions.

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