I’ve written before about the impact of the Great Recession on financing for ministries. Is it harder to qualify for a loan? What about interest rates? And when should a ministry say no to financing as an option for funding their ministry? David Lee is an ECCU relationship manager with two decades of experience working through these questions with ministry leaders. So I asked him to weigh in on them. Here’s what he said.
MBG: The criteria to qualify for a ministry loan have changed since 2008. What is one change that may surprise ministry leaders?
David: Qualifying for any mortgage is clearly more challenging today than it was five years ago. For ministries, the criteria have not changed much, but the minimum standards have changed. We still look at the same five Cs—character, credit, collateral, cash, and cash flow—but lenders are asking more of ministries today than before. For example, much greater emphasis is being placed on cash flow. It’s no longer adequate just to break even every fiscal year. Now a ministry must demonstrate a historical and current positive cash flow (depreciation not included) that will support any proposed annual debt payments.
MBG: Residential mortgage interest rates have been at historic lows. What can ministry leaders expect to pay for a ministry loan today?
David: Loan rates for ministries are also at historic lows (although we’re beginning to see some upward movement in rates) and, as is true of residential mortgages, not all rates are equal. Rate is just one of many “costs” associated with financing, albeit the most obvious one. Other costs that borrowers sometimes overlook are loan origination fees, the cost of failing to meet loan covenant or personal guarantee requirements, or pre-payment penalties. Some commercial loans also have a minimum compensating balance requirement that helps the lender offset for lower rates. If you are a strong borrower, meaning your ministry is financially healthy; rest assured that you will be offered very competitive rates in today’s market.
MBG: What are some red flags that would suggest financing is not the right way to fund a ministry’s vision?
David: If a ministry cannot fulfill their vision initially through the stewardship of their giving, we encourage them to slow down and reconsider whether financing is an appropriate funding option. One hard reality to face is that if financing is needed to fund your vision, it may not be God’s vision. As one of our relationship managers so appropriately stated, “Financing is a bad plan if it is used to reverse negative trends.” Consider raising cash as the first option, because your cash is the cheapest source of funds. In addition, if your ministry seeks financing to replenish cash or bridge a cash flow deficit (other than seasonal cash flow), then financing is not the right option.
You can see why we’ve scheduled David to talk about financing as part of ECCU’s webinar series in August called Funding Your Vision. For more information and to register, visit www.eccu.org/funding-your-vision.