A loan denial isn’t always bad, especially if it leads you to implement a best practice. According to When the Bank Says No a Your Church blog by Lee Dean, being rejected for a loan request creates an opportunity for your ministry to “pursue another lender, adjust the project, improve its financial situation, or a combination of the three.” One way to improve your financial situation is by assessing your ministry’s cash reserves, an important best practice whether or not you’re trying to get a loan. But getting your reserves where they need to be, your ministry can be in a better position to secure that loan approval sometime down the road.
I read last week that the Great Recession officially ended more than a year ago. This probably came as a surprise to ministry leaders who are still working through recession-related issues like declines in giving and real estate values. The latter, in fact, could have significant impact on your ministry’s ability to renew existing debt.
Over the past decade, many churches took out conventional, commercial loans to acquire or build new facilities. Monthly payments were typically calculated on a 25- or 30-year amortization schedule to keep payments manageable. But those loans had maturity dates set at 5, 7, or 10 years. That means that when the loan matures, it must be paid off, refinanced by another lender, or renewed by the existing lender.
Before the Great Recession, the incumbent lender was usually happy to renew a loan after resetting the terms to prevailing market rates. New appraisals were seldom required. Today however, lenders are looking with more scrutiny at maturing loans.
Two areas that lenders are paying more attention to at maturity are:
Debt Coverage – Lenders want to know that a ministry can make loan payments out of its operating budget without dipping into reserves. If your ministry cannot demonstrate a 1:1.25 debt coverage ratio (or even higher in some cases), the lender might set restrictive covenants, increase the interest rate, or even chose not to renew the loan.
Loan to Value (LTV) – Appraisals are revealing that the LTV ratios on many church loans are higher than when first originated. In some cases, real estate values have declined to the point that churches actually owe more than their properties are worth. If your ministry falls in this category, your lender may require additional collateral. If none is available, or if it is insufficient, you may have to pay down the principal balance to bring the loan in line with the LTV requirements.
At ECCU, we’ve developed an informative tool called the Borrower Health Assessment to help ministries understand the risk exposure they may face when their loans mature. Among other things, this tool helps ministries understand their debt coverage and LTV ratios. This information can be immensely valuable in helping a ministry know how to prepare for a loan renewal.
The risks to ministries with maturing loans are significant. Among those risks—more stringent loan terms, a major reduction in cash reserves, or even default. However, with some forecasting and preparation, a ministry can be better equipped to address these risks.
Has your ministry experienced challenges from a pending loan renewal?
Dennis Park is a ministry development officer, financing specialist, and occasional blogger with ECCU.
“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?
