Benefits of Church Bond Financing


How can a church bond issue be the perfect financing option for your Church? As you consider selecting a financing partner for your Church, it may be important to consider the many benefits of church bond financing as you examine the differences between these two financing alternatives:

Consider a bank loan. When a Church borrows money from a bank, the bank is using its depositor’s money, and in return the bank pays those depositors a specified rate of interest for using their money. The bank then makes loans to borrowers who then pay the money back to the bank with interest. The difference between the rate of interest that the bank borrows from its depositors and lends to its borrowers is called the “spread.”

The same concept applies to a church bond issue. The Church is the borrower and the church bond purchaser is the lender. A bond underwriter is the organization that sells the bonds to investors. A bond trustee, registrar and paying agent collects the money from the Church and pays the bondholders, or investors. The Church is making a legal agreement to pay the borrowed money back with interest to the bondholders.

Even though both financing alternatives can have certain similarities, there are also some very distinct differences. With both financing options, there are origination costs. With a bank loan, the origination cost is usually lower than the origination cost for a bond issue. The reason for this difference is to compensate the church bond underwriter and its sales force for originating and selling the church bonds. On the other hand, in return for the underwriting and brokerage fee, in most cases the Church can secure more attractive loan terms than might be available with a bank loan. Many Churches have found that the benefits of church bond financing has been the best long-term alternative for their Church.


The origination fee and brokerage fee can vary depending on the church bond underwriter, the size of the bond issue, and the strength of the Church’s credit. Church bond investors should always read the prospectus for each church bond issue carefully before investing, and consider each Church’s credit quality among other things, and compare one church bond issue with another in an effort to decide which church bond issue may be a more attractive investment.

Many US Corporations, State and Local Governments, School Districts as well as the United States Treasury issue bonds, since bond financing can offer a number of key benefits that these institutions do not receive from traditional bank financing.


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One benefit of church bond financing that a church bond issue can provide a Church with total certainty of fixing the Church’s mortgage payment for the term of the church bond issue. With a church bond issue, the Church can fix the interest rate, the terms, and the repayment schedule of the loan for the full term of the bond issue. Banks generally protect themselves at the expense of the Church, by loaning money with a longer amortization schedule, but a shorter-term fixed interest rate guarantee.

With a bank loan, there usually are a number of conditions or loan covenants associated with the Church loan. Why would this be important to the Church? The primary reason is that as Church leaders go through their annual budgeting and planning process, they will know that another of the benefits of church bond financing is that the Church’s bond debt service payments are established up-front, and that those debt service payments will stay constant for the life of the church bond issue. By selecting a church bond issue, the Church can remove the interest rate risk associated with a bank loan by setting up a permanent loan repayment plan. Another of the benefits of church bond financing is that there will not be a constantly changing dynamic that the Church may get with a bank loan with fluctuating interest rates, changing loan officers, or bank consolidations.


A second of the major benefit of church bond financing is with church bond financing there are usually fewer loan covenants with church bond financing than with a bank loan. What does this mean to the Church? This is another of the benefits of church bond financing that church bonds can provide the Church with the Church having more flexibility as well as control.

For example, the bank may write into the church loan certain on-going operational covenants. What if the Church elected to spend any additional money over its debt service payments for capital improvements? In the case of on-going bank loan operational covenants, the Church may be required to go to the bank for permission to spend the Church’s money for capital improvements. This certainly does not mean that the Church would not get permission from the bank. On the other hand, the bank would be given control over a decision about what a Church could do and how it can spend the Church’s money.

With church bond financing, the Church is not required to come to the church bond underwriter for permission. This can be very important to a Church and its congregation, since instead of the Church leadership and congregation being able to manage the Church’s finances, there is an outside entity, in this case the bank, by reviewing the Church’s financial affairs and ultimately deciding what the Church can and cannot do with the Church’s money.


Another common loan covenant that Churches should be aware of are financial performance ratios. These state that each calendar quarter or each fiscal year, the Church has to measure its financial performance and determine how it is measures up to certain benchmarks included in the bank loan covenants. For example, a bank may have written into the Church’s loan that the Church is required to maintain a certain debt service coverage ratio. What this means is that based on certain financial ratios, the Church may have generated a surplus of cash that is required to be applied to the Church’s mortgage over and above the actual mortgage payment. If the Church does not meet these requirements, then the bank would then have the right to renegotiate the loan. And, what if interest rates went up between the time that the original loan was written and the time the loan was renegotiated? Banks make money not only from the interest they receive from the Church’s loan, but also the fees the bank assesses the Church on the Church’s bank loan. Again, the Church is back to reporting to the bank.

Typically, these are not problems, and another of the benefits of church bond financing. The aforementioned bank loan covenants are not included in a church bond issue. As long as the Church is current with its mortgage payments, the loan terms under a church bond issue will not change.

Over the past several years, many Church leaders have not been concerned with giving levels since the economy has been strong. However, with the last real recession of 2008, many Churches saw their income drop. This is a concern many Churches face when considering a conventional bank loan, and being required to maintain certain financial performance ratios.


Another factor that Church leaders should consider are bank loan prepayment penalties. In many cases, the longer that a bank will agree to fix the interest rate, the larger the prepayment penalty a Church would face should it elect to pay off the loan early. In many cases these prepayment penalties are variable, and are commonly known as “market-to-market” prepayment penalties.


In this case, the bank may offer the Church to provide a loan with a fixed interest rate only for the first few years, which on the surface might sound like good financing terms. However, the bank may include a loan covenant that also states that if the Church were to decide to prepay or refinance the loan, for example in year three (3), then the Church would be required to pay what the bank’s profit would have been for the remaining years of the loan. Therefore, the Church would be required to pay the interest differential back to the bank for how much the bank would have earned on the Church’s loan, and the current rate the bank could loan on the same amount of money to a new borrower.

Does this sound confusing? Let’s take a look at an example: A Church borrows $3 million three (3) years ago, with a twenty-year amortization, but has a fixed rate of six (6) percent for the first seven (7) years. For any of a number of reasons, the Church wants to refinance the loan. Today, if the current lending rate for the bank is five (5) percent for new clients, the bank is planning on receiving money from the Church for the next four (4) years at six (6) percent. Therefore, the bank loses the one (1) percent difference for the remaining four (4) years, and some formula of this amount would be required to be paid to the bank in order for the Church to be able to prepay or retire the loan.

In many cases, Church leaders may not realize that these types of variables or loan covenants exist. They look at the up-front costs of a bond issue and see the larger origination fee, and believe that they will save money by choosing a bank loan instead of a church bond program. After a couple of years into the bank loan, circumstances occur that the Church may decide to refinance, take out another loan, or pay off the current bank loan. All of a sudden, the Church will be required to pay a lot more money back to the bank – even more than if they had chosen a bond issue in the beginning and paid the difference in the origination fees. These are only some of the expenses that many times Church leaders never realize exist until they encounter them at a later date.


A fourth benefit of church bond financing through Share Financial Services is the open-ended mortgage feature. With this feature, the Church may have the option to do additional financing by issuing additional bonds later without being required to refinance the first or original church bond issue.

Consider this example: A Church issues $3 million in bonds today when interest rates are six (6) percent. Four (4) years later, the same Church can qualify and elects to take out another loan for $2 million, but interest rates have risen to eight (8) percent. Another of the benefits of church bond financing is with a church bond issue, the Church can borrow the additional $2 million it needs at eight (8) percent, without being required to refinance the original $3 million loan at the new current lending rate of eight (8) percent. The Church can keep the original $3 million loan at six (6) percent in place. On the other hand, had the Church elected to take out a bank loan, in most cases the bank would require the Church to refinance the first loan at the new current and higher interest rate in order to secure the second loan.



It is important to note that both financing alternatives, church bond financing as well as bank financing, each work well under the right circumstances. If a Church were only to need to borrow money for a year or two, such as for a bridge loan for a capital stewardship campaign, a bank loan is probably a better option. However, if a Church were to require long-term fixed interest rate financing, and given the long-term fixed interest rate feature of church bonds, it may make sense for your Church to consider this and the many other benefits of church bond financing.

Bond financing has been available for hundreds of years. It has proven to be a conservative, time-tested method of borrowing money, not only for Churches, but Corporations, State and Local Governments, School Districts as well as the United States Treasury. Permanence of the Church loan is important, since conventional bank lending has typically run hot and cold depending upon the economy at the time. If you are a Church leader considering bank financing, it is important to consider that if we are in a bad economy, if the financial position of your Church were to change, your loan officer were no longer at the bank, or the bank that you are doing business with is consumed by a larger bank, then a bank may not choose to continue your loan when your loan is up for renewal. With church bond financing, a Church can have permanence that it does not have with a conventional bank loan, and many Churches would prefer to pay interest to its members and other Christian investors rather than to a bank. Church bond financing may not fit in every circumstance, but it is a time-tested method of borrowing money, and offers a number of key benefits to Churches.

Contact Martin Northern, Vice President of Share Financial Services, Inc. at (501) 316-3100, by email at or by clicking the Get Started link on this web site if your Church would like to consider a Church Bond program as an alternative to conventional financing. By simply answering the questions on the Get Started page, we can begin to assist you in the initial stages of launching your Church into a successful Church Bond program. After receiving the completed the form,  we will review your Church information and send you the official Share Financial Services, Inc. Preliminary Information Form and begin by assisting you and your Church with Share’s financial evaluation process.