“When will the church and ministry lending market return to normal?”
That’s one of the most common questions we heard at the recent NACBA conference in Orlando. Some ministry leaders are concerned about finding financing for their next project. Others are wondering whether they’ll be able to renew their existing loans.
These are important questions. The lending landscape has forever changed. At one time, ministries had a wealth of options when looking for a loan. Churches could count on attendance growth and increased giving to fund expansion. Ministries could get loans without having substantial cash reserves. And they expected that their lender could meet all of their current and future financing needs.
Lenders have been forced to become more conservative when considering loan requests. But some important things remain unchanged for ministries that need financing, like the four Cs:
Character—the payment history, leadership skills, and experience of the ministry team
Capacity—the ability to make loan payments out of current operational cash flow
Collateral—the asset used to secure the loan
Cash—the amount of reserves available to cover a temporary decline in giving
While the principles remain the same, the interpretation of them has shifted slightly. When lenders consider the character of a borrower, they’re not analyzing how firm the borrower’s handshake is or whether he or she looks them in the eye. What are they looking for? Proven management. They’re asking, “How has this leadership team managed their ministry in today’s market? What about before the economy changed so dramatically?”
Capacity to make loan payments used to be measured on a one-to-one basis—$1 of net income after expenses (excluding loan payments) for every $1 of loan payments. Now most lenders want $1.25 or more of net income per $1 of payments. What’s it mean? The loan amount a ministry qualifies for today could be much lower than it was a couple years ago.
As for collateral, lenders used to be comfortable approving loans with a 70% loan-to-value ratio (in some cases even higher). As commercial property values decline, lenders are increasingly reluctant to approve loan-to-value ratios over 60%. That means a ministry may qualify for financing, but it will also need to bring more cash to the table than in previous years.
Speaking of cash, it used to be an afterthought. But today, lenders will scrutinize cash reserves. Cash is a key indicator of a ministry’s ability to manage through the ups and downs of the economy.
The end result is that ministries need to plan ahead when considering future financing or an upcoming refinance. One way to plan ahead is to have one of our ministry development officers walk you through our Borrower Health Assessment, which helps ministries determine how a financial institution will view their ministry.
What experience has your ministry had when dealing with financial institutions lately?