Checking in on the Congregation

There is an old adage in lending to do no loans to professions that begin with the letter “P”.  Among these are plumbers, prostitutes, preachers, and politicians.  Among this group, the only one I have seen a problem with an institution I have worked for is the politicians, thought I also have no knowledge of a bank lending to a prostitute, but I do hear it is the oldest profession. 

Some of the loans that paid down their principal the quickest in my career were loans made to churches.  Sometimes lenders shy away from these because all their income is from donations.  They argue that people do not have to give money.  That is true, but I will point out that people do not have to buy from the particular retail store you are lending to or stay in the particular hotel that you have financed as well.  Real estate loans to finance religious buildings such as classrooms, auditoriums, and meeting halls can be an acceptable risk to the institution. 

These require a proper understanding of cash inflows and outflows of the church.  A close inspection should also be made of the history and growth characteristics of the church as well.  Traditionally, loans to established churches in mainline denominations are often less risky as many denominations offer support in areas of doctrine, pledge support, material, personnel, accountability, and in some cases financial support.  Loans to non-denominational churches are often more risky and loans to start-up churches should be avoided unless some other strong compensating factor is present like the presence of deep personnel guarantees.

Different churches have different organizational structures, forms of property ownership, and procedures that must be followed in order to borrow money and pledge collateral.  It is important for the lender to get a proper understanding of these items.  Also, the quality of the financial statements must not be overlooked.  A church that has an annual outside audit and excellent internal tracking where the accounting department can tell you statistics like average giving per family, shows a church that has a superior control on its finances.  Better control, often leads to a higher probability of loan repayment, which is always our goal.

One challenge is that an effective church ministry often seeks to give away as much of the money as it takes in to various ministries and love offerings.  On the surface, the church may look like it is not reaching an adequate cushion after debt service.  The lender must learn what are discretionary and non-discretionary expenses, i.e. in times of tight finances, what expenses can be foregone without substantial deterioration in the church’s ministries to ensure debt service is made.

Proper church underwriting requires the analysis of different ratios than the lender would look at for other commercial loans.  Some good thresholds are to have the loan amount/gross annual receipts at 3x or less.  Another is to cap the loan at $3,500-4,000 per giving unit.  You want to lend to a church with some size so a minimum number of giving units of 100 is good.  You also do not want the annual debt service to exceed 33% of the total annual receipts.  What is important here, is if you have questions, contact us at Midwest Business.  We have experience with church lending and can help.

Church lending can be a rewarding relationship to the credit union.  After all, we always say that we are part of a movement that is larger than ourselves. Perhaps this is one way that we can.  A proper church loan will also build good deposit accounts.  It will also build a good relationship among the folks in the congregation.