Why Don’t Banks Like Church Loans?
Many people believe that only business organizations require loans. However, non-profit organizations and churches also use loans for many purposes such as purchasing real estate, renovating a property, or buying a van for the church. Yet, church building loans aren’t as easily accessible as churches desire.
Most banks and other financial institutions don’t like church loans. As a result, many churches fail to secure the crucial funding they need. This article explains why banks don’t like church loans, what you need to do to secure church financing and other critical information.
Church loans refer to external financing arrangements that religious or faith-based organizations enter with financial institutions. Notably, the religious organizations could also be:
- Other religious groups
A church may borrow to build, maintain, or expand a property. Many other legitimate purposes exist for which churches can apply for loans. So, a church loan is any financial advancement a church receives to repay within a defined period.
Generally, churches and other faith-based organizations are non-profits. So, they’re tax-exempt and usually don’t run businesses for profit. A church’s income may thus be restricted to tithes, offerings, and other free-will donations.
Suppose the church has a school or other educational institution. Then, they can also get tuition and additional fees. Furthermore, churches with property sometimes rent them out to receive additional income.
However, a church with limited sources of income may run into financial troubles. This is because capital-intensive needs can easily trump free-will donations. So, churches need loans to cover what their traditional sources of income cannot cover.
Many people genuinely cannot understand why churches need loans. Of course, this stems from the traditional idea that only commercial organizations that do business for profit require loans. However, churches can take loans for several reasons. Some of them include:
When church membership increases, the current building may be too small for its services. Therefore, they’ll require a new structure. However, new members may not immediately reflect in the church’s accounts, but the church needs a new venue immediately.
Consequently, a church loan becomes a viable option. The church can start its new structure with a loan and pay it off when the new membership boosts its finances.
Sometimes, the church doesn’t need a new structure. Instead, its building problems can be fixed via renovations or structural repairs. Both plans are still costly, though.
As such, many churches still need loans for their renovations. An unplanned repair can be just as expensive as a renovation. Hence, external financing is also vital.
Expanding Church Programs and Outreaches
Many churches have special programs and outreaches. These could be:
- Children’s camps
- Community outreaches
- Medical outreaches
- Missionary works
Whatever the case, church programs often cost a lot of money. So, suppose a church doesn’t have enough money to run its outreaches in a year. Then, they may have to get a loan.
Churches aren’t too different from businesses and other organizations. For example, they sometimes run out of cash for daily expenditures. This may be the result of a temporary financial setback.
But whatever the case, the church must keep running until its finances improve. So, one way that it can maintain its cash flow is by getting a loan. Finally, a church loan for daily expenses often comes from an expectation of future cash injection into the church.
Churches often must make major purchases too. This could be to get entirely new equipment or change existing ones. So, a church may need to purchase:
- Musical instruments
- Video and recording equipment
- Sound enhancement tools
The cost of these pieces of equipment has significantly increased. So, a church may be unable to dip into its pockets to make the purchases. Hence, it can get a loan and repay the lender over a long period.
There are several other reasons a church may get a loan. Some of them include:
- Expanding existing church buildings
- Improving accessibility to the church building, such as making provisions for the disabled
- Refinancing existing church mortgages
So, why exactly do churches experience difficulties in getting loans from banks? Is it the churches’ fault, or are there other reasons? Below, we explain some reasons banks don’t like church loans.
Many banks don’t like church loans because they neither understand churches nor other non-profit organizations. Indeed, it sounds unreal, but banks don’t understand this market. Moreover, since churches weren’t in the traditional lending pool for financial institutions, the banks never studied them.
Also, there’s more to churches’ financial and legal side than tax exemptions. As a result, some banks don’t know how to review church financial statements. They don’t know how to apply loan analysis procedures to churches. Hence, the banks hesitate to consider church financing.
Banks often predict a borrower’s financial growth potential before granting them any loans. These projections show how much money the organization will make in a definite period. So, this information informs the lender of the chances of the borrower repaying the loan.
Unfortunately, judging a church’s financial growth is tricky. This is because a religious institution’s income depends on the offerings and tithes of its members, not production and sale projections for companies. Banks are thus stuck with calculating how many church members will remain.
In addition, they must check the chances of these members freely donating significant sums. But a pastor who grew a church from 500 members to 1,000 may be unable to get the church to the 2,000 capacity required to fulfill the loan. Since growth isn’t certain, banks often avoid the risk.
Banks must sometimes foreclose on the collateral when borrowers can’t repay their loans. But religion is a very sensitive issue, and church buildings have become major symbols of Christian denominations.
Therefore, banks are reluctant to lend to churches because of the possibility of foreclosing on the church buildings. Selling a borrower’s house portrays banks as greedy, and it’ll be worse if banks foreclose churches because it’ll look like they’re foreclosing on God.
Most churches use their existing structures as collateral for loans. If they default on the loan, the bank can sell the building. This is how banks can recover the principal sum and interests.
However, church buildings have limited application and low resale value. They’re not like residential or commercial buildings with different uses. So, banks may face significant challenges when they want to sell the structure.
In fact, during the wide foreclosures on churches following the 2008 financial crisis, most of the distressed churches were bought by other congregations. Therefore, lending to churches limits the client pool in the case of foreclosure. This is a sufficient reason for banks shy away church loans.
Many churches don’t ask crucial questions before applying for loans. Therefore, many end up asking for church financing, which they don’t need. For example, there’s the “if we build it, they’ll come” ideology.
It means that some churches believe that if they build larger auditoriums, the buildings will attract more members. Then, these new members will contribute to paying off the loan. However, banks prefer that the church has already exceeded its current capacity before seeking loans for new buildings.
This is because even large and growing churches can’t guarantee that they’ll fill up new, larger buildings. So, since many churches have this “build first, they’ll come later” mentality, banks are reluctant to grant such applications.
Some churches have a falling out with their pastor and either force the pastor to leave or members leave the church. These types of events make banks nervous because they do not know if enough members will stay to pay the loan back.
Members attend churches for various reasons and can leave for many other justifications. Thus, there’s no guarantee that the members whose financial support encourages a pastor to seek a loan will stay in the church long enough to contribute to its repayment.
Lending institutions focus on the borrower’s ability and means of repaying the loan with interest. So, how exactly do churches repay church building loans?
The source of repayment is a crucial factor affecting why banks dislike church financing. So, we’ll discuss the different ways churches repay loans below.
Yes, tithes and offerings are the major ways churches repay their loans. Repayment projections are often based on a church’s income from members’ donations for some years. Statistics show that churches, at 29%, are the greatest recipients of charitable giving in the US.
Thus, this repayment option depends on three vital factors, including:
- The size of the church’s membership,
- The members willingness to give, and
- How much the members give over definite periods.
For example, large churches may have an easier time repaying their loans than smaller congregations. However, smaller churches with more generous or wealthy members will also pay easily. Unfortunately, membership and members income are often unstable. Thus, banks don’t always rely on this sole factor when considering church financing.
Finally, banks that do make loans to churches will often require the personal guarantees of one or more of the church members. This is not ideal because it places the member at personal financial risk if something goes wrong with the repayment of the loan.
Therefore, the lender can proceed against the church and the guarantor in default cases. However, the downside of this method is obvious too. If the guarantor’s finances dwindle, both they and the church will be unable to repay the loan. Hence, the bank may have no reliable source for getting the loan or interest.
Suppose your church needs financing, and you decide that a bank is not your best source of financing. Then, you may need to consider alternative sources of raising cash. The below examples are some of the ways churches raise money.
Before getting a loan, a church may consider holding fundraising campaigns for its project. However, the church needs a creative and practical idea to raise significant funds. Then, depending on the church’s techniques and its campaign’s success, they may not need to borrow money.
Some ideas for your church’s fundraising include:
- Hosting community events
- Church yard sales
- Hosting auctions
- Having virtual offering plates
- Hosting movie nights
- Running social media giving campaigns
- Youth group activities
Churches may also qualify for certain types of grants. Grants are sums of money set aside to help registered organizations. So, it could be part of the government’s plans to boost the economy and develop communities.
Generally, there are three types of grants your church can apply for, including:
- Federal grants for non-profits
- Non-federal grants for non-profits
- Grants from charitable organizations
Church grants are available for all religious groups. Moreover, unlike loans, your church needs not to repay the grant. Therefore, you can see church grants as one-time donations from the government or charitable organizations.
Yes, we remember that churches aren’t business organizations. However, there are some products the church can start making to boost its finances. For example, churches can begin writing and selling books.
Furthermore, books written by leaders and members could be exclusively sold by the church. Statistics showed that the revenue of religious presses increased by 14.7% in 2019, reaching $1.22 billion.
We already established that banks don’t like church financing. However, this doesn’t mean your church loan application will die on arrival. Instead, many banks and other financial institutions are still willing to provide the necessary funding for churches.
Fortunately, you can improve your chances of getting a church loan if you do not commence the loan application process without proper preparation. The tips below can get you the church loan you need on time.
Yes, creditworthiness isn’t only vital for individual borrowers. Instead, churches also need an impressive credit history. Good credit depends on how well you handle or have previously handled your bills, debts, and loans. Thus, it’s not too different from managing your personal credit history.
Therefore, the steps for maintaining a good credit history are similar. For example, if you apply for a loan, it’ll be best to stick to the repayment plan. Defaulting on payment will leave a bad record on your history.
If you find that you are unable to make the loan payment, it is best to be upfront with the lender and let them know what your plans are to get back on track.
Finally, getting a church credit card is another option you should consider. If you do, you must be sure to keep your spending well below the card’s credit limit. Paying off the card early will also improve your credit score.
Next, full disclosure is vital to get that church loan. Church financing application processes require that you submit several pieces of information to the bank. Some of them include:
- Your three years financial statements
- Membership data
- Church constitution
- Resolution or minutes of meeting authorizing the loan application
If any of these requirements are missing, you’ll have difficulty finding a financier. So, it’ll be best to ensure you submit all the correct documents. Therefore, working with paid or contract staff may be better than using volunteers.
Notably, too, some details, especially in your financial statements, may also be unfavorable. However, withholding such information, although tempting, is a bad idea. This is because the lender will see it as acting in bad faith.
Also, withholding critical data will destroy the trust necessary for the loan process. So, it’s better to include the information and explain any unfavorable aspects to the bank.
Many churches only focus on their loan application needs and don’t draw up a repayment plan. But banks are more interested in getting back their capital and interest. Such loan applications thus fail sometimes.
Conversely, supporting your loan application with a detailed repayment plan will increase your chances of getting church financing. Again, it’ll help if you don’t just rely on your members’ tithes and offerings. A more stable source of money will be more appealing to the bank.
After everything, repayment of your church loan will most likely depend on your members’ generosity. Therefore, church membership records are essential. It would be best to show the bank your current membership and how much it’s grown in the last few years.
As mentioned, your past growth is the only way the bank can predict your church’s future membership and financial growth. Thus, you’ll need to keep the following books:
- Church attendance registers
- Records of tithes and offerings
Keeping these detailed accounts also gives you an A+ in organization and builds trust with the financial institution.
Finally, having done all the hard work, it’s essential that you properly understand the bank you’re asking for a loan. The documents you submit to the bank help it understand your church and how it’s run. So, it’s only proper that you also know the financial institution in-depth.
Learning about the bank would involve checking its vision to see if it aligns with your church’s ideals. Furthermore, it’ll be best to go with financiers with a long history of lending to churches. A loan agreement leads to a long-term relationship. Therefore, ensure that your church and the bank are on the same page before entering any binding arrangements.
If you’re applying for a church loan, it should already be clear that getting the loan wouldn’t be as easy as it’ll be for commercial organizations. Banks generally don’t like church loans for the reasons we explained above. Fortunately, this doesn’t mean you cannot get a church loan.
Instead, the tips we’ve shared above can help you convince lenders to grant you the financing you need. In addition, it’s vital to go for lenders that are invested in your church’s plans and visions for the loan. This will ensure that you have a smooth relationship from when they grant the loan until repayment.
When your Church is ready to seek financing, then Griffin Church Loans can help. They understand Church finances, and their nationwide loan programs include: Refinances, Renovation, Construction, and Purchase. They work with Churches regardless of their credit standing and offer competitive interest rates and loan terms. They have 5, 10,15, and 20-year fixed rates available with up to 30-year amortizations.
Call 800-710-6762 to speak with a loan analyst today.