This is the last post in the series “How to Prepare Your Church for a Loan“.

In the first 2 posts, we talked about how to use your Financial Statements to get ready. You can read those posts here: Balance Sheet, Income Statement

6 Other Areas the Lender Will Be Interested In:

1. They’ll look at the strength and stability of the leadership.

Perhaps first and foremost is the ability of the Pastor and Finance Leaders to articulate the financial condition of the church, the financial plans for the future and how those tie into the church’s Vision and Strategy going forward.

They’ll also be assessing/looking for evidence of good financial management/stewardship of the finances up to this point as evidenced in the historical financial records.

They also will want to see that leadership has maximized the capacity of current facilities (like going to multiple services) before expanding.

Lastly, they’ll be inquiring about the tenure of the Pastor and other key leaders.

2. They’ll ask for current and historical budgets.

Make sure you can articulate the drivers of budget changes over the last 3 years in terms of income AND expenses. It’ll give them a feel for how well your church budgeted in the past, what changes occurred and how did the church handle them – in terms of how the church managed budget overages/shortages.

At a minimum they’ll want to see budgeted giving vs. actual giving over the past 3 years in order to give credence to the next item…

3. Forecasted/Projected Financial Statements

Generally, banks look at the rate of giving growth in the past in order to gauge the future – that’s going to be their litmus test of your projections – that, and your past budgeted vs actual. I mean, if you consistently budgeted way more or way less than actual, and you use that same logic in your projections, then be prepared.

Now, having said that, you could introduce a one time “giving bump” reflecting your expectations of what will happen once you’re in the new church facilities. Make a credible case that attendance and givers will increase after the new church goes live. This is actually relatively common, but there are exceptions. I saw this in my church. Our giving increased 33% the year after we moved in (moved half-way thru the year). They increased in the years that followed too at a higher rate than prior to the move, but were much lower than the 33%, but still really high by most standards – 10% in year 2 and 11% in year 3.

Whatever you use in your giving projections, support them with the variables that drive them – projected attendance, the # of givers, $ per giver, per capita giving and giving units to attendance ratio.

As to expenses, be able to explain the drivers of spending growth in your projections – the addition of staff, launching of a new ministry, increased giving (for those expenses that directly correspond to giving), and so on.

Lastly, calculate and understand your DSCR in these projections. They’ll need to be over 1.0, even if you’re planning on paying the note from a Capital Campaign (designated giving).

4. The Use of Proforma Financial Statements (optional)

In some cases, it may be clarifying to adjust past Financial Statements for one time charges to show the impact without those nonrecurring charges on the year they occurred. It simply takes out those fluctuations in expenses and more importantly, shows what cash flow would have been without them.

Conversely, the other side of the coin is removing one time large donations that didn’t or won’t recur. Obviously, you need to define “large” in your context, but I’m speaking of really large.

The other option instead is to exclude nonrecurring income or expenses in the projections. Just have footnotes relative to what’s been excluded in the forecasts.

I’m not trying to make it more difficult than it it needs to be, use whichever method you can explain or articulate the best. The more thoughtful you are here to give consideration to these items in your projections, the more comfortable the bank will be with your ability to plan and steward the finances well. (You’re not employing the broad brush approach – which is mediocrity…the church must do its due diligence). This ties into #1 above.

5. Loan to Value 

You’ll need a sizable down payment and/or collateral of existing properties to achieve a LTV ratio of 70% to 75% – meaning you may need as much as 30% in equity before the loan can be approved. In the event of a default, the bank has some cushion to lower the price below the appraised value by as much as 30% to get its money back. It’s also best for your church to have its own funds at stake to show the church owns and believes in the vision of church leadership.

6. They’ll want to make sure you have/obtained adequate property (and liability) coverages on all properties used as collateral.

I don’t think this needs any clarification. Before the loan can be closed, you must present proof of adequate insurance.

In Closing:

All these items in this and the previous posts can lead to better rates and terms as well.

One other point I’d make – find a lender or banker who has a heart for the church.

Now that concludes the series.

In my next post, we’ll talk about expanding with or without debt.