Ultimate Guide on Church Finances Best Practices
Finance in the world of home buying and personal wealth management is tricky enough, but in many ways church financing is an entirely different animal. Some of the rules that apply to standard finance apply, but many others do not, or are tweaked in some way. We all know that there is a separation between church and state and that that separation will affect taxes, but how is it different, and what are the effects? What are the best practices for church finances?
This simple, in-depth church financing primer is here to help you navigate all the ins and outs of church finances. Consider this Church Financing 101.
We’ve broken this up into three sections. First, we’re going to talk about the day-to-day finances of managing a church. Second, we’re going to talk about how to prepare ourselves for troubled times (because there are always going to be troubled times, and when they come people very often look to the church for help). Finally, we’re going to talk about planning for the future and managing growth.
Managing a Church’s Financials
“Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the LORD of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.”
Good budgeting and financial management of the money your church brings in is not only supported by the wisdom of men, but by scripture, and it says that by gathering up tithes into the storehouse we’ll see blessings that there will not be room enough to receive them. But first, before we see those blessings, we have to gather in those tithes, and for that we have to be financially savvy to avoid both errors and unethical desires.
Another important aspect of the best practices for church finances is budgeting. A good budget is the first step in managing our daily money situation, and what we should look at any time we try to decide if we have money to build this new gymnasium or install new seats in the chapel. We should look at it before we plan our charity drives and our patronages.
A budget should consist of everything we plan to pay for in a given month (or year), including such things as personnel costs. These costs are simple to count, as staffing needs and salaries (or other compensation) should be known costs. Granted, this can change month-to-month as need has it, but generally we can know that this person makes X amount of money, and that person makes Y amount of money. Generally speaking, a church should trying to shoot for personnel costs to be around 33% of their total spending, with 45% being at the high end in extreme circumstances.
The next thing to determine is occupancy costs, which include all of the things that keep the church up and running: mortgage payment, lease payments, utilities, internet, insurance, maintenance, phone, etc. This occupancy cost should exceed more than 30% of the church’s budget.
Finally, you have the office expenses, which include advertising, printing (include the cost of either a computer and printer or a Xerox machine), postage, and small equipment. You’ll want to monitor these items for depreciation, just as you would a large piece of equipment at your house.
As you plan your budget, look at it with an eye to the future: are you going to need to hire new staff? Going to need to buy a new computer? Going to need to renovate a building? Launch a new ad campaign? Send out Christmas cards? All of these things will affect how your budget forecast will look for the upcoming year.
It’s essentially that you sock away some of your income for a savings or rainy day fund, in the event we run into another COVID-19 or some other natural disaster where your church is called upon to step up their charitable efforts. Of course, it’s wise to have a buffer in the budget anyway, especially as you’re saving money for a future large expense, such as an expansion or a real estate deal, but keeping a small cash reserve of 10-25% of your monthly expenses is especially wise.
Frequently Asked Budget Questions:
When Do I Need to Determine a Budget? Quarterly? Monthly? Yearly?
Ideally, you want to be setting your monthly budget once a year. If you use the fiscal calendar, you’ll want to start this in October, otherwise January is a good time to begin. But note that it’s hard to set a budget while you’re already spending that budgeted money, so you want to get it finalized before you’re running up expenses.
When Do I Need to Check on the Budget?
As often as you can, but definitely monthly. Depending on your organization system, you may close out books once a month so you’ll be more aware of this than most churches, but if you at least look at the budget before you make large expenditures (you probably don’t need to check the budget when someone prints out flyers for the potluck) then you’ll be ahead of the game.
What if the Budget and Reality Don’t Match?
This is a source of concern, because it could mean that you’re overspending. But it also could be a sign that you’ve just entered a new financial agreement–perhaps upgrading your audio system, or fixing the air conditioner–and that money has to come from somewhere. Hopefully, this will be covered by the cash reserves that you’ve set aside. But look at the big picture–look at the yearly budget. Are you being responsible in the long run? If so, you’re okay. If not, you might need to reevaluate.
“The thoughts of the diligent tend only to plenteousness; but of every one that is hasty only to want.”
Savings in a budget lead to financial security (or plenteousness) while being a spendthrift leads only to want. When you set aside those cash reserves in your budget, you’re preparing yourself so that you’re able to take care of those in need in the time they need it, or to expand the size and facilities of the church when the membership requires it.
Furthermore, these cash reserves help keep the church solvent when calamity strikes and income decreases. When the people are suffering, they may not be able to make the donations to the church that they once had, and have cash reserves will help you be able to pay the bills while the giving is low.
When it comes to big purchases and investments, you generally want to make sure that you don’t bleed your cash reserves dry. You want to keep a three-to-six month buffer–at least–to make sure that you can cover expenses should the worst situation arise.
Growing Your Congregation and Church
“And though your beginning was small, your latter days will be very great.”
There comes a time when a church grows too big for its facility–this is great! This means that you’ve been doing everything well, you’ve been spreading the word, your congregation has been giving you great word-of-mouth references. Now is the time to move out of that small church and into something bigger. We may not be talking about a mega-church here, but a larger congregation that will hold your blossoming flock. It’s time to start looking into buying a building.
Buying Real Estate
Buying real estate is nerve wracking for anyone, but we make the whole situation as easy as possible. Our specialty is in church financing and we want to be able to give you a wide variety of options you can choose from.
Church Financing and Guarantee
Generally speaking, we do not expect the church to provide a personal guarantee on a loan–most of the loan products we offer don’t involve guarantees. There are exceptions to this, however, which the most basic being a loan where the church can only borrow $500,000 but the property is $600,000. That will require a personal guarantee. For example, there are times when the underwriter might offer you the full amount of church financing you are requesting provided they receive personal guarantee(s) strong enough to make them feel comfortable. Such personal guarantees might drop off after the church reaches and holds a Debt Service Coverage Ratio that makes the underwriter comfortable for a period of time.
Church Financing and SBA Loans
SBA loans (or Small Business Administration loans) are not available to most non-profit organizations, like churches, but there are exceptions such as the SBA Disaster Relief Loans (such as loans after Hurricane Katrina).
When a traditional for-profit borrower falls behind on its payments to a lender, it will often find out quickly that most lenders are unforgiving and will take legal action to protect their interests including foreclosing on the property very quickly. This is where churches benefit from the type of organization they are. In many instances, a traditional lender that would not think twice about taking a property from a traditional business will work with a church when they get into trouble. Often a lender will give the church interest only payments for a period of time, allow them to tack on past due payments to the end of a loan, wave penalties, among other things. However, when the lender decides that they have done all they can and the church is still unable to make the payments then foreclosure is probably imminent.
Private Money Loan
If a church finds itself in a position where its payments are late and they are unable to refinance with a traditional loan or borrow money from members then one of the last options is a Private Money loan. There are very few companies in the country that offer Private Money Loans to churches, and we happen to be one of them. We offer traditional loans with great interest rates and loan terms,and when a church is in trouble, we have a solution. The Private Money loans we offer are lenient and creative and can often be closed extremely quickly.
Seller Held Second Trusts
Using Seller Held Second Trusts in conjunction with traditional church financing, a Seller Held Second Trust is a loan from the seller of a property to the buyer of the property for a portion of the total amount the buyer is borrowing. In most cases, the church loans we offer have a maximum Loan to Value of 80%, what this means is that if you are buying a property for $1,000,000 the lender will agree to loan to the church $800,000 and you need to come up with $200,000. What if you don’t have $200,000 and you cannot raise the shortfall quickly? Sometimes a seller will agree to loan you some of the shortfall so it may be possible to have the church put down 10% of the purchase price and the seller hold 10% of the purchase price and the lender carry the rest.
The loan from the seller of the building to the church is in a subordinate position to the loan from the lender. Being in a subordinate position means that if something goes wrong and the lender has to foreclose and take the building, the seller loses all of their money before the lender loses any of their money. If there is enough money to pay off both the lender and the seller, then the seller will be paid off also. But, if there is a loss, all of that loss is borne by the property seller before the lender incurs any loss. There are lots of nuances to using a seller held note and they do not always work and for purposes of describing how the process works, I have greatly simplified things here.
Loans for Buying New Land
“For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?”
We at Griffin Capital Funding offer four types of loans for those who are wishing to expand their campus, be it through a sanctuary, a gymnasium, a family life center, or any other number of worthy projects.
There are four types of church-construction loans we offer:
- Financing for churches that already own property and want to expand the footprint of their existing building.
- Churches that want to buy land and build a new building.
- Churches that want to buy property that already has a building on it and build an addition to their property.
- Churches that are in the middle of a construction project, have run out of money, and the project stalled.
Benefits of Loans
Most of our church construction loan programs have the following benefits:
- Finance up to 100% of the project cost as long as the total project cost does not exceed 80% of the completed value of the property. This is good for churches that do not have or do not want to use their cash but already own land that they want to build on.
- No Personal Guarantees are usually needed on our church loans.
- No audited financial statements are usually needed.
- Interest only payments during construction.
- Loan turns into a permanent loan on completion of the construction. So, there is only one loan closing, saving the church money.
- Low interest rate and great church loan terms.
What is the maximum amount of money a church can afford to borrow?
Underwriters take many factors into consideration when determining the maximum borrowing capacity of a church. A good rough estimate of the general range a church can borrow is to take the last 12 months of gross general tithes and offerings income and multiply that number by 3 times and by 5 times and that will generally give you the low end of what the church can borrow and the high end of what the Church can borrow. As an example if a church has gross income of $500,000 per year they can probably borrow between $1,500,000 and $2,500,000
Construction Completion of a Church in Progress:
Each year, we have the great fortune of working with thousands of churches and some of those are in difficult situations; one of the most difficult situations is a stalled construction project. Whether the church ran out of money, has cost overruns or their lender is refusing to honor the draw requests, we can likely help. Over the years we have provided financing to help finish churches that are unable to complete their construction project because of a lack of funding.
If your church is looking for a construction loan, we want to help, our advice is free whether we provide the financing for your project or not.