Hi there. Welcome back.
We’re continuing on in the 3 part series “How to Prepare your Church for a Loan“.
In part 1, we looked at the Statement of Financial Position (Balance Sheet). If you missed it, you can read it here.
Today let’s take a look at the Statement of Activities (Income Statement):
Undesignated Giving
They’ll be looking at undesignated giving for the current year and the prior 3. They’ll be looking at growth trends.
Have these metrics available as supporting data for the undesignated giving above:
Attendance #’s (Worship and Total), the # of Givers, Annual Giving per Giver, Annual per Capita Giving and Givers Ratio to Attendance.
They’re looking at growth in dollars and the underlying drivers of the growth. Understand each of these drivers as to what’s driving them up/down etc.
Next, they’ll want to assess the stability of the giving base:
Take a look at the top 25% of givers year over year. (In my own experience, the top 25% gave around 65% of total dollars). You may adjust this to fit your own context. How long have they been giving? A stable giving base is important. Is there a large churn of givers particularly those in the top 25? Also, is there any one or more than one person giving 10% or more of the budget? You may need to exclude them from the projections for the bank, or have a reserve that compensates for this.
Calculate the Proposed Annual Debt Payment per Giver and understand in terms of the additional amount your givers would have to give on average on top of budget giving to make the payment.
Designated Giving
If you’re currently in debt, they’ll be looking at any designated giving towards that debt and any related current/past capital campaigns and pledges. Have each campaign broken down by year – pledge amount vs. amounts actually received. Gather the Pledge Participation and Actual Participation rates as % of Undesignated Givers. Know what your large donations were in each year.
They’ll want to understand any other significant designated giving as well.
Expenses
They’ll take a look at expenses for the current year and the prior 3. Make sure you understand the base line year and can articulate the changes leading up to the current year.
At a minimum, you can count on them looking to understand the fixed costs of the church such as salaries & benefits and leases. As to S&B – be ready to answer how many are on staff, what are their positions and the nature of the benefits they have. You’ll need to understand what % of budget S&B’s have been and are currently. In addition, know how they compare to other churches your size.
Cash Flow
This may be the single biggest thing they’ll look at and probably the first thing they look at. Are you currently, and have you been generating a POSITIVE cash flow from undesignated funds? Capture and understand Cash Flow trends. If one or more years were negative, be prepared to explain why. Conversely if one year is significantly better than the others, be prepared to explain. (May have had a large one time gift).
At the end of the day
The lender will make an assessment of the quality and accuracy of your financial statements. Just know they may want a CPA Firm to Review or Audit the Financials if this is something the church has not had done recently.
Generally, loans under $5 million may get by with a Review whereas loans over $5 million will most likely require an Audit. Another option would be have a Review done along with a Control Assessment. That’s really helpful and doesn’t cost as much as a full blown audit.
In part 3, we’ll look at what’s required of leadership, forward looking statements, the use of proforma financial statements and more.