Ecclesiastes 4:12 tells us that “a cord of three strands is not easily broken.” How true has this been in so many areas of our personal lives?
The same biblical wisdom certainly applies to ministries as they seek to maximize the gifts the Lord has given them and steward those gifts towards best accomplishing their vision and calling. Nowhere is a strong biblical partnership in finance more important than when a church is considering taking on debt.
A Shared Calling
There’s incredible value in finding financing partners that are equally yoked with your ministry’s vision and calling. It is this shared faith and commitment to furthering God’s Kingdom that creates that cord of three strands that is so essential to the financial health of a ministry.
As you seek to discern these things, a few things to ask those potential partners are questions such as:
- Do they share your values?
- How do they live out those values in their institutions?
- How many similar ministries do they work with?
- What are some examples of how they’ve helped a ministry be more effective and efficient?
- What are some examples of when they were able to walk with a ministry through a crisis?
Seek a partner that views church finance as a core part of who they are, not just another line of business. These institutions often have a strong core of staff that are active in their own church, serve on finance and leadership teams, and have a heart for ministries. Those bankers have often seen the same things you are challenged by, and they will be more likely to have insight based on their experience that may translate well to your situation.
Understanding Debt in Ministry
A key component of church finance is developing a policy on debt. Should the ministry take on debt at all, and if so, for how much, and for how long? What is the best structure? What loan covenants should a ministry agree to and what should they avoid?
If you do determine that debt is an appropriate tool to help achieve your church’s vision, consider these key factors:
Underwriting
This may sound simple, but make sure your bank understands how to properly underwrite a church loan. Many banks lump ministry lending in with other types of commercial lending, and they may underwrite in a way that is less advantageous for your ministry.
For example, a traditional bank may look at a “Debt Service Coverage Ratio” (or DSCR) threshold, often in the 1.25-1.75x range. We all know that churches by design spend nearly everything that comes in. That’s the purpose, after all – to take tithes and offerings and put those funds back into the community in pursuit of the Great Commission! Yet some banks will not understand that and tell you that you don’t qualify because the “DSCR” is insufficient.
A better way to look at it would be to look at the ratio of debt service (loan payment) to monthly undesignated tithes and offerings. Typically, you’d like to see that number in the 25%-30% range. The logic is that if debt service is 25-30% of budget and personnel is 40-45% of budget, you still have 25-35% of your budget for education, youth, evangelism, outreach, benevolence, etc.
Payment Structure: One size does not fit all. There are a variety of ways to structure a church loan, and some important considerations include these questions:
- Is a simple 15-year term loan sufficient?
- Will we have a multi-phase building plan?
- Would a revolving line of credit make sense to reduce costs and improve flexibility?
- How quickly can we realistically become debt free?
- Is the payment amount the most crucial factor, or is total interest expense?
- How much growth will our project provide, and how much of that will go toward debt retirement?
In our experience, most church debt gets retired early, whether through the growth a new facility provides, through strong capital campaigns, or through special gifts that are unexpected blessings for a ministry (we’ve seen the Lord provide pleasant surprises many times over the years!). However, properly matching debt structure to the anticipated seasons of life of the church can be a tremendous blessing as the church grows.
Rate Structure
Opinions vary on this issue. Most commercial and church loans are priced similarly, usually being tied to an index such as National Prime Rate or various U.S. T-Bill rates. Floating rate loans move with every change in National Prime Rate, while some loans will be fixed for anywhere from 3 to 10 years typically. What’s the best choice?
Several considerations should be factored:
- Are rates likely to go up or down in the next couple of years?
- Do I want to lock in a rate and risk a prepayment penalty if I may be able to pay debt down early?
- Will anticipated capital campaign funds come in as expected and significantly reduce debt early?
- Does an Interest Rate Swap make sense to reduce risk?
- Would bifurcating the loan – part fixed, part variable – make sense to reduce risk?
Ask, Seek, Knock
As you know, the ministry world is quite interconnected. Seek wisdom from those ministers and lay leaders at churches you respect, and don’t limit it to those in your denomination or apostolic circles. Often, just by asking a few questions, you can obtain valuable insight as to best practices for financial controls, banking relationships, and professional partners to help you establish a framework for accountability and excellence moving forward. Churches who have undertaken successful projects are usually delighted to share their experience and their references.
And, of course, ask the Lord, who will give wisdom generously and without reproach, to guide you to those who can best provide financial wisdom and stewardship for your ministry to accomplish all that He has set out for you.
Dennis Phillips serves as president and chief executive officer of First Bank of Owasso, Oklahoma, a leader in church ministry finance nationwide with a heart and passion for building the Kingdom through church and ministry banking, www.firstbank.net.
