So your church is growing and needs to expand.

Chances are your church needs to borrow money.

The lender needs to make sure your church can repay what it borrows – with interest of course. And, for the record, your church wants to be able to repay too.

Banks now more than ever, have to do their due diligence – and have to do so with the FDIC looking over their shoulder.

Whether your church is borrowing for the very first time or borrowing from a different lender, over the course of this 3 part series, we’ll look at what you need to get your arms around before approaching a lender.

I’m devoting Part 1 & 2 entirely to the Financial Statements. After all, that’s ground zero. It’s the foundational first look to see if it’s worth moving forward…or at least, it’s where the lender will start.

So…

They’ll look at historical financial statements. Duh. Typically the current and 3 prior years. They’ll look at The Big 3 – Statement of Financial Position, Statement of Activities and Statement of Cash Flow.

Today, let’s start with the Statement of Financial Position:

Months of Operating Cash

Banks look favorably on “reserves” and will want the church to have an operating cash reserve. I’ve seen articles saying a solid reserve here is 3 months of cash on hand and a strong one is 6 months.

Months of Debt Service

A bank will want a separate reserve dedicated to debt service. If you don’t have one at the time of loan application, you’ll need to have a plan in place. A solid reserve is 6 months, a strong one 12 months.

As to reserves, in my mind, there’s no hard and fast rule of how many weeks or months to have, but you do need some reserves. Establish your position and articulate it to the lender. [I wrote about reserves here]

Designated Cash

They’ll inquire on these fund amounts, purpose and what % of offerings are designated. [wrote about designated fund policy as part of this post]

Fixed Assets

They may inquire about Fixed Assets values. Is there a detailed listing by asset? Are any assets collateral for an existing loan, are the values shown net of depreciation and if so, what are the useful lives being employed. Are any assets shown a part of a capital lease?

Payables/Liabilities

They’ll want to understand how you pay your bills. Namely, whether or not you pay on time. They may look at aged payables and probably will ask for vendor references/credit checks. They may ask you to walk them thru your purchase and disbursement processes as part of this or as part of their review of your expenses.

They’ll calculate Debt Service Coverage Ratio, so you need to have already done so and understand this ratio as well. Hopefully it’s at least 1.0, ideally at 1.2 or above.

They may or may not make various inquires as to other liabilities on your Balance Sheet. What is the make up of Accrued Liabilities, for example.

If you’re already in debt, have all the pertinents ready for that loan.

Bottom Line – have your Balance Sheet in order and understand the drivers of all line items.

In my next post, we look at the Income Statement or Statement of Activities.