By: Therese DeGroot
Long-term interest rates are at all-time lows, so many religious organizations are considering refinancing existing debt and possibly borrowing more to undertake important building projects. Does it make sense to refinance and increase debt in this economic environment? The answer is, YES!!!
The most important thing to consider in refinancing a loan is what the current interest rate is on the existing loan and how much money, if any, will be saved by refinancing to a lower rate after you add back costs incurred to refinance.
Refinancing should absolutely be considered now to fix a floating or adjustable rate loan while fixed rates are so low. Securing a fixed rate loan makes for proactive budgeting and predictable debt service and ensures that ministry and outreach programs continue to be funded, as well as expanded.
Refinancing almost always makes sense when the proposed fixed rate is at least 1% lower than the current fixed rate and, most certainly, if you need additional funds for a building, renovation, or remodeling project.
If the project will expand sanctuary seating or increase much-needed parking, improve child care facilities, or enlarge the fellowship area to encourage increased attendance, then the project should certainly be considered. Thought should also be given to projects that will update and improve facilities, as well as the overall impact the project will have on reaching out to the community.
Equally important in this process is finding a financial partner who is experienced in religious lending, committed, and financially stable. Finding a financial institution that understands the unique nature of how religious organizations operate is critical, as well as one that is well capitalized and liquid. Do you want one who walks alongside you or one who gives you the loan and walks away? A partner involved in helping you realize your vision or just wants to know it exists?
Some lenders may structure the loan as a real estate loan and not be mindful of the cash flow nature of churches. This can result in a loan that is too large for the congregation to debt service or too small to build out the vision; covenants either too restrictive or not relevant to churches; an interest rate higher than it should be based on perceived high risk.
After selecting your lender, it is a good idea to meet the decision-making team, as well as the relationship manager. In the event of turnover, you won't have to explain your important work again.
In preparing a loan package, presentation is everything. You want to present a well-organized, professional, and thorough loan package that represents how important your stewardship responsibilities are.
The better the quality of your information, the more successful you will be in securing the best financing available. Making the lender comfortable that checks, balances, processes, and procedures are in place will be beneficial in terms of loan amount, lender confidence, and the best pricing available.
Lenders want to be sure the organization has a well-run business office with proper accounting and financial systems in place with appropriate controls and up-to-date technology. This will help in the preparation of financial statements, capital campaign information, and cash management reports, as well as guard against possible embezzlement or fraud.
Developing comprehensive business practices will improve the business office and the quality of information disseminating from there. Quality financial statements that will keep the church above reproach should be considered one of your best practices. When requesting financing, it benefits the organization if the lender knows it is an important part of your stewardship responsibility.
In the case where financing is needed for a building project, a building plan and budget should be developed and submitted to ensure the project can be funded and completed on time and on budget. The budget should not exceed total loan proceeds and cash on hand.
Consider breaking down large building projects into smaller phases. Build what your congregation can afford while continuing to grow ministry and outreach programs. Avoid a common pitfall in that the congregation becomes over-burdened with too much debt, which stalls growth as funds are redirected away from programs to pay debt service.
An important part of any building plan is a fundraising campaign to give your congregation the opportunity to participate in building projects, even small ones. In addition to minimizing the amount of debt required to complete the project, it engages the congregation in the process.
People will give to expand the vision, if it is compelling one, not just to build a building. Restating your vision and presenting a well-crafted case with a call to action will provide a solid starting point.
Whether your church is a mega, destination, multi-site, community, or neighborhood church, your vision statement reflects the heart of the church. Program development should be incorporated into fundraising initiatives, as well as financial and community outreach goals. Committing resources to both the execution and follow-up of even a small campaign is important and will serve you well.
Refinancing or increasing your debt now provides not only the opportunity to fix or lower your interest rate, but also to consider other important initiatives, such as building projects to expand program development and community outreach.
While doing the necessary preparation and due diligence to determine if refinancing is cost-effective requires effort, it is well worth the time.
A lower rate and the right financial partner will support the vision of your church and put you in relationship with a lender that you can trust through the expected and unexpected ebbs and flows of every religious organization.
Therese DeGroot has developed and managed religious lending programs for over 20 years for many banks that now specialize in lending to churches and schools. She is market president of First Bank's Community First Financial Resources Division, www.cffinancialresources.com.