by Jac La Tour
“Would our ministry qualify for a loan?” As the economy continues to recover, many ministry leaders are asking this question. One place to find answers is the people who make loan decisions. So I asked two ECCU lending experts who not only have extensive experience but also helped guide many ministries through the economic turmoil of the past four years.
Mike Boblit is an ECCU regional director. Randy Marsh is a senior relationship manager. Here are my questions and their responses.
Jac: What is one requirement to qualify for a commercial loan that is dramatically different today than it was four years ago?
Mike: Cash flow requirements are much more stringent. Previously, if a potential borrower could demonstrate the ability to achieve a 1:1 cash flow ratio ($100 in available cash flow for every $100 in debt service), either by past performance or a well-defined budget, lenders could get comfortable making a loan. Today, a prospective borrower must have a consistent 1:1.25 cash flow ratio ($125 in available cash flow for every $100 in debt service). This must be demonstrated with historic cash flow performance, not just a budget that projects cash flow.
Jac: How does a ministry decide how much debt is too much for them today?
Mike: It’s similar to determining the correct amount of debt for your ministry. Too much debt is any amount that a ministry cannot budget and set aside before taking on the debt. A ministry that thinks it can handle $200,000 in annual debt service should budget that amount several years before incurring the debt to insure that they can live with it.
Here’s a rule of thumb: Your ministry’s personnel costs (e.g., salary, benefits, housing) and debt service should not exceed 65 percent of its total income.
Jac: Randy, you worked with a lot of ministries that struggled financially during the recession. How important did you find strong leadership to be when tough times hit?
Randy: Though most ministries survived and many thrived during the economic downturn, an alarming number failed. In most cases, the recession did not directly cause these failures; it revealed other, correctable pre-existing issues. One was inadequate leadership and financial accountability. Leaders who best navigated the Great Recession demonstrated three best practices. They were proactive, accountable, and attentive to spending (not just giving). Proactive means they made hard choices, like laying off staff in time to avoid worse financial difficulties. Accountability means having the right people involved in financial decisions. In some cases, key leaders were unaware of spending decisions until the ministry was facing foreclosure. Finally, good leaders’ calls for increased giving were accompanied by spending cuts.
Jac: How important is cash flow when a ministry is applying for a loan?
Randy: When the economy was booming, many churches took the “If you build it they will come” approach. Even if attendance fell below projections, they could usually get by because attenders’ incomes kept increasing. In hard economic times, many families’ incomes dropped, and their charitable giving did too. Job insecurity led many people to give less and save more. The impact of these realities is that, as Mike said, a ministry’s ability to show sufficient cash flow is more important than ever.
Mike and Randy will have much more to say about how the Great Recession reshaped the lending landscape at a webinar being presented by the Christian Leadership Alliance on Thursday, June 27, from 9:00 to 10:00 a.m. (PT). When I asked Mike for an important takeaway attendees could expect, he said they’ll get a good overview of current lending criteria and learn how lenders determine the credit worthiness of potential borrowers.
For more information and to register for How to Look Like a Healthy Borrower, visit www.eccu.org/cla-webinar.