Financial management can be daunting…
Few things are more stressful for church leaders than compiling the annual budget. Proper financial management can be both intimidating and at times overwhelming. Yet, good accounting practices can go a long way down the road toward financial stability for a church. A well-organized budget and accounting controls can allow church leadership to focus less on administrative issues and afford more time and energy toward ministry and outreach.
Planning. Checking. Planning some more.
A good church budget can provide a way to track the income and expenses giving church leadership the information necessary to make the best strategic financial decisions.
When creating a church budget for the upcoming year, one budgeting approach is to start from zero and evaluate each expense line item based on the church’s ministry needs. There are many different types of expenses that go into maintaining the church, from staff salaries to computer equipment to items such as choir robes and Sunday School materials. A well-designed church budget can assist church leaders with keeping track of various costs and expenses to make certain that the necessary funds are available when needed.
A good church budget can assist church leaders with keeping track of various income sources, such as tithes, offerings, and certain designated giving such as building fund contributions. Federal, state and local economic conditions at any given time can make it difficult for church leaders to forecast future income the church will receive, so consider historical income trends as one way to forecast future giving. Conservative budgeting is one way to avoid funding shortfalls. Church leaders can revisit the church budget mid-year to make the necessary adjustments to avoid overspending or underspending in important key areas.
The importance of proper financial management cannot be overstated, because it is the foundation for financial sustainability and stability of the church. Good fiscal accountability can allow the church to conduct important ministry projects without the burden of worrying how to keep the lights on. A healthy budget can help feed a healthy church.
Church Financing Options
There are similar features with a church bond as there are with a commercial loan, in that a church bond program is fixed for a certain period of time and has a certain repayment schedule. One of the biggest benefits that church bond financing can offer a church that most conventional bank loans cannot provide, is that church bond financing can provide churches with a fixed interest rate and repayment schedule similar to a fixed rate residential mortgage loan. On the other hand, with church bond financing, the church has more flexibility and control since the interest rate and the amortization or repayment period is fixed the full term of the church bond issue. With church bond financing, the church is effectively setting up a permanent repayment plan for the entire term of the bond program. With a church bond program, the church is paying the interest on the church’s loan to church bond investors, such as members and friends of the church, and other church bond investors and not to a bank.
Consider All Church Financing Options
Consider all options when seeking financing for your church. Conventional bank financing can be a better financing option under certain circumstances. For example, if a church is only in need of short-term financing, then a bank loan may be the better option. However, if the church needs or wants the certainty of a long-term fixed interest rate and repayment period, then church bond financing may be the better financing option. Church bonds can give the church a long-term, fixed interest rate and repayment period that it would not have with a commercial bank loan. And, many churches with long-term capital needs prefer that the interest paid on their church loan go directly to church members and other Christian investors, instead of a bank.
The Loan Arranger
Whenever a church begins a construction project, renovation project, or purchases property for a new church facility, and doesn’t have enough money to pay for these projects, often a church will seek a conventional bank loan. Most people are familiar with residential mortgages, but since a church is a non-profit organization, churches require a different type of mortgage or loan, commonly known as a commercial loan. By comparison, the length of time until the loan matures, the interest rate and the repayment schedule are three features that set a commercial loan apart from a residential mortgage.
I’m listening, but how can loans be bad for my church?
Okay, we will get to that in a moment. To better understand why considering various church financing options are an important issue when looking for a financing solution, we need to look at the way a commercial loan works.
With certain types of residential mortgages, the interest rate and repayment schedule or amortization can vary, but in many cases those interest rates and amortization schedules are fixed for up to as much as thirty (30) years of the mortgage loan. In other words, in the case of a thirty (30) year fixed-rate mortgage, that is 360 months of paying the same payment amount until the mortgage loan is retired, or paid back. On the other hand, with a commercial loan, the interest rates and repayment schedules are different from a residential mortgage. The stated interest rate and amortization schedule are not fixed. In the case of a commercial church loan, in the beginning, the amortization schedule may be set for as many as twenty (20) to twenty-five (25) years, but the church loan usually will come up for renewal or become due after the first three (3) to five (5) years. The final payment on the renewal or due date is what is referred to as a “Balloon Payment”. When a church’s balloon payment comes due, the church is faced with the decision to either refinance the existing loan at what can be a higher interest rate and payment, or search for a new loan with another lender.
So while the initial interest rate and loan payment of a commercial loan can be enticing, it can also end up costing the church much more in the long run.
In the next article, we will discuss Church Bonds as an alternative to a conventional commercial bank loan.
When the unexpected happens…
The practice of risk management and insurance coverage usually isn’t something church leadership thinks about on a regular basis. However, the proper comprehensive insurance coverage can help your church to prepare for the unexpected and to maintain a comfortable environment for your members.
Churches are subject to lawsuits just as any other organization. Getting the proper insurance coverage is an essential and necessary step to protecting your church and its members for many types of losses. While insurance protection does not eliminate a good safety plan, it can be a valuable tool.
What does this have to do with church financing?
When financing or refinancing your church loan with church bonds, funds become available for a new church facility or various capital improvements of the existing church building. Because many churches will utilize volunteer help with various construction projects, what happens if something breaks or falls on that person? Your church can now become liable for those damages. This is why having the proper insurance coverage is a necessity for a church or ministry.
Okay you’ve convinced me, now what do I need?
There are two basic types of insurance coverage that you should consider for your church:
1.) Property Coverage – This includes specialized forms of insurance coverage for the church buildings and equipment that provides for certain financial reimbursement to the church for most risks, in the event of destruction from fire, theft, and certain natural disasters. It should be noted that many basic property insurance policies do not cover losses from floods and earthquakes, so if your church is located in a high-risk area of these occurrences, make sure that your church has additional insurance coverage for the possibility of losses from these catastrophic events.
2.) Casualty Coverage – This type of insurance coverage broadly covers the risk of financial losses not directly concerned with life insurance, health insurance or property insurance. In general, casualty insurance covers the legal side of things, whether it is property damage or injury to a church member, worker, or visitor. Having the proper casualty insurance coverage can help prevent financial losses to the church from unforeseen lawsuits and medical bills.
It is important to note that this article, as well as the other articles on this site, are not intended to be a thorough, in-depth analysis of specific insurance, legal, business, accounting, or tax advice, and is not a formal opinion of these issues. There is no substitute for a comprehensive insurance package designed by professionals that have the skill, knowledge, and expertise in the various insurance products and services specifically designed for religious institutions. Proper insurance planning can help a church and its leaders mitigate these risks and to prepare for the unexpected. Having the right insurance coverage can be a valuable tool to allow your ministry to do those things it needs to do without the risk of being burdened with unforeseen expenses in the future.
In this article, we will discuss the final two of the Five Practical Steps in Securing Funding for Your Church
4.) Put together a good project team. Just because you are a church, that doesn’t mean that you can’t use the same mindset employed by other successful businesses and organizations. Most successful companies put together project teams that communicate well, and at the same time are team players. Successful business leaders surround themselves with talented, hard-working people. Likewise, select someone from the Church to head up and establish a project team. Delegate as much authority to that person and team as they need, so they can keep the project moving in the right direction. In many instances, this person may need to be brought on staff full time to handle the project, so as to not strictly rely on volunteers to handle the project.
5.) Consider Church Bonds versus a Bank Loan. When a church secures a bank loan, that church is borrowing from the bank, and that bank loan is indirectly funded by the bank’s depositors. In many cases, the bank will have an interest in the church’s success, but the bank is more concerned with charging and receiving interest and fees on the money loaned to the church. One difference between a Bank Loan and a Church Bond is that the church bondholders are the lenders the money to the church. In the final analysis, the lending agreement of a church bond loan is between the church and the bondholders, collectively administered by an independent bond trustee. Church Bonds effectively cuts out the middleman, i.e. the bank. Banks can make more money by making loans that have a longer amortization, or payback period, which in most cases mean adjusted interest rates, and more interest and fees paid by the church to the bank throughout the term of the bank loan. On the other hand, when a church issues a Church Bond, that church has more flexibility and control of the church’s loan and repayment of that loan by having a fully-amortized, fixed interest rate throughout the entire period of the church bond loan.
Securing financing for your church can be a difficult task, but in many cases a necessary one. In the end, a proper understanding of both the financing challenges your church may face and the correct solutions to those challenges can lead to a more effective ministry and positive outcome for your church.
Earlier, we discussed Five Typical Church Financing Issues churches and church leadership can face when begin the process of Securing Financing for Your Church. However, the following are Five Practical Steps in Securing Funding for Your Church:
Five Practical Steps in Securing Funding for Your Church
1.) Realistically Assess the Final Value. Some churches will engage the services of a licensed real estate appraiser to realistically assess the “As-Is” as well as the “As-If Complete” final value of the church’s proposed renovation or construction project.
2.) Long. Term. Strategy. Make sure those three words are a part of your vocabulary. The most important phase of any church renovation or construction project is to plan for the future. Church Leadership, assisted by various outside professionals, can assist in determining the church’s long-term facility, land, and renovation needs. The church’s Long-Term Financing is just that, a long period of time that the church will be affected by how the construction project is funded in the beginning.
3.) Develop a Balanced Budget. In order to plan properly, it is important to determine what the church can realistically afford to spend. It is not uncommon for a church to consult with architects and contractors before speaking with a lender. A lender that understands church financing can provide important details, such as how much the church can effectively afford to spend, and what a realistic interest rate on the proposed church loan will be. Input in the planning stages from a reputable church lender may help to avoid costly delays and possibly avoid any disappointment the church may experience during the renovation and construction process.
In the next article, we will discuss the final two of the Five Practical Steps in Securing Funding for Your Church.
In the previous article, we discussed the first two of Five Typical Church Financing Issues churches and church leadership can face as they are Securing Financing for Your Church.
3.) Church buildings are a special-purpose facility. Lenders are concerned that if the church defaults on the church loan by failing to make timely payment of principal and interest payments on the church loan, that the lender will be required to foreclose on the church and assume ownership and sell the church facility. This can make it difficult for the lender to recover their original investment, because most church facilities are built to look like a church, and in accordance to that particular congregation’s beliefs and tradition. This can make it difficult for the lender to sell the church facility knowing that they might not be able to get back their investment.
4.) Change in the church’s nonprofit corporate tax status could adversely affect its revenues. Churches operate as a nonprofit religious corporation and as such currently qualify for various exemptions from state and federal taxes. Under current tax law, churches receive contributions from donors that are deductible for those donors for certain federal and state income tax purposes. The elimination of any or all of these income tax exemptions through
legislative action or otherwise, could adversely affect the church’s revenues and its ability to repay the church loan.
5.) Many lenders frequently require personal guarantors for church loans. Personal guarantees of the church’s loan is not always appropriate for church financing since not all churches are governed by one individual. The financial structure of many churches do not lend itself to the typical lender/guarantor financing model. The lack of personal guarantees could cause certain lenders to be unwilling to make a loan to a church. Only after one or more members of a church have provided personal guarantees will some lenders provide funding. In addition, a lender’s requirement of personal guarantees can cause internal friction among certain church members in the event that a member, that has personally guaranteed the loan to the church, should decide to leave the church.
In the next article, we will discuss practical solutions for Securing Financing for Your Church.
Basic Understanding of Securing Financing for Your Church
As you begin the process of Securing Financing for your Church, many churches and church leaders may encounter certain challenges that are unique to church finance. The process of securing financing for a church can be one of the more difficult loans to secure, because a church loan can require a specialized commercial real estate loan that in many cases is not widely available. Churches are not like other business organizations primarily because churches are dependent upon voluntary contributions, the loss of the senior pastor’s services could adversely affect the church’s ability to repay the loan, church buildings are a special-purpose facility, a change in the church’s nonprofit corporate tax status could adversely affect its revenues, and many lenders frequently require personal guarantors for church loans.
Five Typical Church Financing Issues
Before the solutions to the issues many churches face when attempting to secure financing can be properly addressed, it is important to understand Five Typical Church Financing Issues churches and church leadership can face as they arrange financing for their church.
- Churches are dependent upon voluntary contributions.
Churches are dependent upon voluntary contributions of its membership and attendees as its primary source of support and income. Lenders realize that in the future that there is no assurance that church membership, attendance or per capita contributions will increase or remain stable. Future contributions to the church may fluctuate due to factors such as a decline in the national, regional or local economy, changes in key church leadership and staff, or other unpredictable conditions. Consequently, there is no guarantee that the church will be able to make timely payment of principal and interest on the church’s loan in the future.
- Loss of the senior pastor’s services could adversely affect the church’s ability to repay the loan.
The church’s senior pastor serves a significant role in the leadership, management, growth and viability of the church. Lenders understand that the loss of the senior pastor due to resignation, retirement, termination, disability or death is indeterminable and could adversely affect the church’s ability to repay the loan.
In the next article, we will continue our discussion with three additional challenges that churches and church leadership can face when Securing Financing for Your Church.
1) Before you select a contractor, ask for recent audited financial statements. Experienced contractors are accustomed to providing this information, and will not object to sharing this information with you.
2) Ask the contractor for a surety bond. This can be important because a surety bond can make certain that the contractor is financially insured to complete the project. It is also important to note that in some states that contractors are required to be bonded in order to have a Contractor License.
3) Ask questions. This may seem that it goes without saying, but make certain that all of your questions and concerns are addressed before beginning the renovation project. It is certainly easier to address these issues in the beginning before they become a major problem at a later date or during construction.
4) Ask the prospective contractor for their three to five year history of construction volume. Just as a lack of business can be problem, many construction companies likewise have experienced financial difficulties because they have grown too rapidly.
5) Select a contractor with experience in renovating projects of similar size and style. Check the contractor’s references and make certain that they are well known in their trade, along with satisfied customers.
These are Five Considerations before Beginning a Renovation Project of a Church Facility that we hope are useful as you begin your renovation project. Renovation projects can be a stressful time for all concerned, however they can also be an exciting time for the church congregation and the history of the church.
Two Common Reasons to Renovate a Church Facility
Two common reasons for renovating a church facility are to meet the demands of a growing congregation and maintaining an aging building. When the furnishings, fixtures, floors, walls and windows begin to show signs of disrepair, or an increasing number of church members are to the point where the lack of useable space has become a problem, it can become necessary for the church to consider a renovation project. Increased lighting, sound, and added seating in the church sanctuary may temporarily correct some of the lacking small functional aspects of a church facility, but it usually takes a decision by the congregation to renovate the entire church facility to properly correct these issues. Many churches simply do not have room in their budget and experience with church construction, consequently those church congregations often delay making necessary facility improvements. By delaying the decision to make certain church facility improvements in many cases can leave those church congregations in the future with much larger construction and renovation expenses, and unpredictable outcomes. Many church leaders have been faced with having to make certain tough decisions later, simply because the church could not afford to maintain outdated church facilities.
So, where do we begin?
What is often overlooked when beginning a church renovation or construction project is that many church members have differing and often conflicting opinions. Many times, church leadership and building committee members have found that starting this process can take several months and may lead to many sleepless nights. Those long hours in building committee meetings can certainly cause a lot of stress on those concerned, and have caused needless delays with the renovation project. One way of addressing this issue is by hiring an architect and contractor that has experience in church construction.
Because many churches have experienced these issues as they begin their renovation project, we hope that the next article, Five Considerations before Beginning a Renovation Project of a Church Facility will help your church avoid some of the problems we have discussed.