Church Financing Options - Church Loan Difficulties

A church loan is likely to be the most difficult type of business loan to complete successfully. Since churches are an integral part of local community infrastructures, it is important to explore all church financing options. A typical church loan will require strategies involving unique commercial real estate financing that is not easy to locate.

Churches are not typical commercial enterprises but they do have substantial business financing requirements. This article will offer an overview of four key church loan financing difficulties and a listing of six practical church financing strategies.

Four Critical Church Financing Obstacles

Prior to describing alternative approaches for typical church loan financing requirements, it is important to discuss the typical church financing obstacles. Church loans have historically been difficult to arrange because of several key issues:

(1) Church Financing Difficulty Number One: Church properties are unique. Lenders are therefore concerned that if commercial loan payments are not made in a timely manner and the lender is required to assume ownership of the property, it will be very difficult to find a new owner because of the unique property features.

(2) Church Financing Difficulty Number Two: Lenders frequently want personal guarantors for church loans, and this requirement is not appropriate for church financing. The financial structure of churches simply does not lend itself to a traditional lender/guarantor approach. But most lenders are uncomfortable with the potential lack of guarantors (especially because of the previous observation about the difficulty of reselling the church property should it become necessary).

It is not unusual to have a church loan that has been finalized only after several church members have given a private guarantee for church loan financing. The normal request for private guarantors acts as a major difficulty because there might not be individuals who have the necessary net worth to provide a private guarantee for large church loan financing requirements and because church members might prefer not to act in this capacity even if they are financially capable of doing so.

(3) Church Loan Obstacle Number Three: When a church loan is approved, there are often onerous terms such as not enough financing, short-term loans, low loan-to-value (LTV) of 50% to 60% and high interest rates. These unacceptable terms are similar to the church financing being disapproved, and if the terms are accepted, the church might experience financial problems due to the commercial mortgage loan conditions.

(4) Church Loan Financing Barrier Number Four: Renovation, construction and land acquisition are frequently more difficult to get approved than church purchases or refinancing. Due to this, repairs are often postponed and new churches commonly take several years to complete.

Six Prudent Church Loan Financing Approaches

There are several prudent business loan strategies for the church loan financing obstacles described previously. Here is an outline of church loan solutions that are available from a select number of non-traditional church lenders:

(1) Church Financing Solution Number One: Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender. This particular church loan solution means that lender decisions will not be based on personal guarantors in any way.

(2) Church Loan Financing Approach Number Two: Long-term business loans. Church financing will produce more effective financial results for the church when it is long-term because payments will typically be substantially decreased.

(3) Church Loan Financing Approach Number Three: Low interest rates. Many churches have been charged excessive interest rates because they did not realize what other financial options they might have.

With payments limited to prime plus 1% or less, church financing payments will be noticeably reduced. Together with a longer-term church loan, the overall payment decrease will improve church cash flow.

(4) Church Financing Solution Number Four: Minimum church loan size of $500,000. This allows churches to complete most financing in one step rather than piecemeal over a period of years.

(5) Church Loan Strategy Number Five: A Higher LTV (up to 85% is routinely doable). This results in a more reasonable amount of 15% or slightly more (rather than 40% to 50% possibilities with many church loan financing alternatives) for the church to provide.

(6) Church Loan Financing Approach Number Six: Church financing options include renovation, land acquisition, new construction, purchase and refinancing. Due to flexible church loan financing, it is not necessary for any of these important church loan activities to be postponed.

Altogether the six church loan financing strategies provided above should produce significant benefits for many churches by allowing refinancing with improved financial terms and by facilitating the new construction needs of churches much more quickly. The six church loan strategies should provide financial terms that will complement the long-term financial condition of pragmatic churches which follow the church loan financing strategies described.

Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.

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