What Do You Need to Qualify for a Church Loan?
Applying for a church loan is an exciting prospect, because it means that you’re embarking on some new journey for you and your congregation. You’re increasing your ability to minister. You’re expanding your facilities to accommodate more congregants, or perhaps expanding to accommodate youth programs, or soup kitchens, or any other number of worthy practices. You may be making infrastructure changes to your existing building, putting in air conditioning or fixing an old heater. You may be buying additional land to expand your parking lot–or to build an outdoor pavilion. There can be any number of reasons why a church would want to qualify for a church loan, each of them as noble as the last.
But it can be a daunting task. For most pastors, finance was never taught in seminary. While there may be a lucky church leader who has an accountant or banker in their congregation to give them advice, it’s common to be flying blind. And even if you’ve gone through a loan application process before (getting a mortgage for your house, for instance) it’s very different when applying for a church loan. You’re going to be told a lot of different things by different lenders and we want you to know what sets us apart. As a teaser, we almost never require personal guarantees on our church loans.
Items You’ll Need in Your Application
First, the paperwork of qualifying for a church loan. What will you need? What is required by the lender? Hopefully either you or a church employee or volunteer has been managing the books and can provide all of this documentation when needed. If you do not have financial documentation available and you do not know how to create the financial statements, we can help you with that also.
Here is the documentation you need to apply for a church loan. (This list is not exhaustive; every lender is different, but it will give you a good idea.)
A history of the church, its leadership, and its background.
Your lender will want to see what kind of church you have, what your focus is, and the consistency of your leadership. They’ll be interested to know how you’ve spent money in the past: do you fund a lot of missionary trips? Have you done renovations to your building? Do you spend much of your resources giving to the poor? All of these things will be important to your lender. There’s no right or wrong answer here; different lenders are looking for different things. Just be honest and as comprehensive as you can be.
A List of Donations and Pledges
We’ll get into income in a minute, but this is referring specifically to large donors and capital campaigns. A church that is able to get large donations from congregants or other organizations is generally a good investment for the lender. However, we also do lots of loans for small churches with little income, so don’t let this scare you off, if you are a small church.
Service Attendance Records
This can be part of the history of the church and its background, but you’ll want to give a comprehensive accounting of the church membership and attendance. Is your congregation growing? Stagnating? Flagging? All of these are important things for lenders to know when they’re evaluating your church loan.
Now we’re getting into income. Three years of statements is generally acceptable, plus the most up-to-date accounting of the current partial year. The lender wants to see how much money you’re bringing in and how you are spending the money.
The lender will want to see the last three years of the church’s balance sheets plus a current balance sheet that includes all of your assets and liabilities. This includes any property, buildings, vehicles, and other assets, as well as any pledges made during capital campaigns.
Projected Income/Expense Statements
This forecast will examine how you plan to pay for the loan you’re seeking, as well as if you have pledges and donations that will be coming in the future. The lender will want to know what additional expenses you’ll have once the church loan is in place, in addition to the cost of the debt. (For example, if you’re getting a church loan to build a new facility, this forecast will not only want to know how you’ll pay the loan premiums, but also the utility bills.)
Details of the Scope of the Project
You don’t need to deliver a full set of blueprints to your lender, but they’re going to want to see how exactly the money is going to be spent and where it will be invested. This information is generally available from your architect, engineer or contractor if you are involved in a building project.
The Four C’s (Or is it Five?)
In lending, there is something called the Four C’s, but when it comes to church loans, some lenders include a fifth C.
Capital refers to the liquidity that the church has, and its ability to make a down payment on the church loan. This down payment can be anywhere from 20-40% depending on the lender, the nature of the project, and the economic conditions.
Next they will want to look at cash flow, also known as income and is generally in the form of tithes and offerings. This will help them know if you’re able to repay the loan. Typically, a lender will want the church’s loan payment to not exceed 35% of their cash flow. Another good rule of thumb is that the loan shouldn’t exceed 4 years’ of the church’s income: if you’re applying for a four million dollar loan, then the church probably needs to have a million dollars in income.
Collateral is what you use to secure the debt. Typically this is with property. The more collateral you have, the better.
Credit is the credit history of the church. Has it been paying its bills on time? This is very similar to an individual’s FICO score. We almost never require personal guarantees, but many lenders do require personal guarantees.
Finally, some lenders who look at church loans specifically take a fifth C into consideration: character. Obviously, this isn’t quantifiable, but it encompasses credit, length of history of the church, how long the leadership has been in their positions, and the church’s reputation.