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Church Financing Options - Church Loan Difficulties

Church financing is possibly the most difficult commercial mortgage to arrange. Since churches represent an integral part of most communities, it is clearly desirable to improve church loan options if at all possible. In almost all cases church financing will require a very specialized commercial mortgage that is typically not widely available.

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 looking at different strategies for church financing, it is important to discuss typical church loan barriers. A typical church loan will be difficult to arrange due to four primary factors:

(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.

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 Loan Obstacle Number Three: When a church loan is approved, there are often onerous terms such as not enough financing, short-term loans, low loan-to-value (LTV) of 50% to 60% and high interest rates. These unacceptable terms are similar to the church financing being disapproved, and if the terms are accepted, the church might experience financial problems due to the commercial mortgage loan conditions.

(4) Church Loan Obstacle Number Four: Land acquisition, construction and renovation funding are usually more difficult to obtain than church refinancing and purchases. Because of this, repairs are often postponed and new churches can take years to build.

Six Practical Church Financing Solutions

There are several prudent business loan strategies for the church loan financing obstacles described previously. Here is an outline of church loan solutions that are available from a select number of non-traditional church 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 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 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 Financing Solution Number Five: High LTV (75% to 85% is available). This results in a more workable amount of 15% to 25% (rather than 40% to 50% with a traditional church loan) for the down payment or non-financed portion in refinancing.

(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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