ECCU Blog

One thing many ministries discovered during the economic downturn is that they weren’t as financially solid as they thought. As revenue declined, their financial vulnerability became increasingly apparent. Loan payments, for example, that once seemed realistic suddenly weren’t.

One way ECCU responded to this situation was by forming a new team to help struggling member ministries become financially healthy again. I asked Don Hughes, who led that team and is now one of ECCU’s regional directors, a couple questions about what we learned from this experience.

First question: By working with ministries that struggled financially during the recession, you discovered a link between strong leadership and financial health. Is leadership really that important?

Don: When it comes to financial health, solid leadership is not just important, it’s essential. We’ve learned that ministries with well defined organizational structures, appropriate levels of true accountability, and leaders who have transferable educational and business skills tend to be highly effective. These ministries don’t react to economic changes, they actually plan for them. Their strong leaders translate the ministry’s vision and goals into a workable budget that becomes a tool to help the ministry meet its financial obligations and continue to pursue its mission. Their disciplined financial leadership also includes implementing appropriate financial controls, closely monitoring and managing the ministry’s financial position, and making course corrections to stay on track.

Second question: How does a ministry decide how much debt is too much for them?

Don: This can be a complicated question to answer, but the first step should be to consider where their vision is taking them and whether acquiring debt is the most effective way to achieve that vision. Assuming it is, they’ll need to take a comprehensive look at their income. Based on historical data, is it reliable and sustainable? Is it stable, growing, or declining? They should then evaluate all their expenses and other financial obligations. This information will reveal whether there’s enough margin (positive cash flow) in their budget to maintain adequate reserves and financial flexibility. For churches, some experts use these budgeting benchmarks: Less than 35 percent for debt service, less than 35 percent for salary-related expenses, and at least 30 percent for liquidity and ministry. These are not absolutes—and certainly not applicable to all ministries—but they do provide a starting point for a “right-sized” debt discussion.                                  

I asked Don these questions because he’ll join two of his fellow regional directors to present a webinar on February 21 titled How to Look Like a Healthy Borrower.                                                                         

If you’d like more information about this webinar, you’ll find it here.

Before mid-2008, most ministries had little trouble qualifying for financing. If they met a lender’s criteria, they were deemed a healthy borrower and it was simply a matter of time and paperwork before the needed funds were in hand.

Then the Great Recession hit, and when it was over, the definition of a “healthy borrower” had changed dramatically. I asked Mike Boblit, one of ECCU’s regional directors, a couple questions about this dramatic shift.

First question: What is one criterion used to underwrite loans that is dramatically different today?

Mike: I’d say the debt coverage requirement. Prior to 2008, if a ministry didn’t have past cash flow statements that demonstrated their ability to make mortgage payments of a certain size, they could meet this lending criterion by presenting a strong budget. Meaning, if their budget showed how they could cut other expenses to make a new mortgage payment, that would satisfy the debt coverage requirement. Today, borrowers must demonstrate, from historic cash flow statements, that excess funds are available to make a new loan payment.

Second question: During and since the recession, the term “tight credit” became commonplace. What does it mean and what is one significant way it has affected ministries?

Mike: Tight credit can be interpreted a number of ways. One is lenders being “tight” about lending money, with “tighter” borrower criteria. This has certainly affected ministries by making it difficult to find a willing lender or more difficult to qualify for a loan. Another way to look at “tight credit” is in reference to ministry borrowers. In this case, it means a ministry is highly leveraged. This looks like a loan payment that is 30 percent or more of a ministry’s income, which creates a tight budget that limits the ministry’s ability to make choices about how they use ministry funds.                                  

I asked Mike these questions because he and two of his fellow regional directors will present a webinar on February 21 titled How to Look Like a Healthy Borrower. Besides their lending expertise, all three of these men gained a wealth of experience by working with ministries during the recession and helping them return to financial health.

When I asked Mike what people could expect to learn by attending this webinar, here’s what he said:

“We would expect attendees to have a better understanding of how a lender will evaluate their ministry’s ability to qualify for a loan. In other words, the criteria a lender will use to make lending decisions. Additionally, by understanding these criteria, attendees will have a better idea of how to prepare financially to borrow funds if their ministry’s strategic plan includes purchasing or building a new facility and using a loan as a portion of the funds to accomplish this.”                                                                                                      

If you’d like more information about this webinar, you’ll find it here.

“Over the past several years, many churches made the mistake of borrowing everything a bank was willing to lend them. As a result, many ministries are facing the strangling hold of lenders and interest payments. Seek to restructure the debt…and resolve to never again borrow an amount of money that would jeopardize the ministry.” – Joseph  Sangl, Top 10 Financial Mistakes Churches Make

Yeah, that hits a nerve for me. So I would add this to Sangl’s advice: Along with resolving to never allow debt to jeopardize your ministry, align your ministry with a financial partner who cares about your vision as much as you do and will help protect you from such decisions.

Check out the rest of the list at Top 10 Financial Mistakes Churches Make. Has your church bounced back from making any of these common mistakes? How did you recover?

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.