Church Loan Problems - Church Financing Solutions

Church financing is possibly the most difficult commercial mortgage to arrange. Since churches represent an integral part of most communities, it is clearly desirable to improve church loan options if at all possible. In almost all cases church financing will require a very specialized commercial mortgage that is typically not widely available.

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

Before looking at different strategies for church financing, it is important to discuss typical church loan barriers. A typical church loan will be difficult to arrange due to four primary factors:

(1) Church Loan Financing Barrier Number One: Most church properties are unique in comparison to other commercial properties. Due to this, church lenders are likely to be concerned that if business loan payments are not made as agreed, it will be a challenge to find a new owner interested in the unique property attributes.

(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).

As a result, it is common to find that church loans have been obtained only after one or more church members have provided a personal guarantee for a church loan. The requirement for personal guarantors acts as a severe obstacle because church members might be unwilling to act in this capacity and because there simply might not be individuals who have sufficient net worth to provide a personal guarantee for a large church loan.

(3) Church Loan Financing Barrier Number Three: When church loan financing is finalized, there are typically poor terms such as short-term loans, high interest rates, insufficient financing and low loan-to-value (LTV) of 50% to 60%. Such terms are equivalent to the church loan financing being rejected, and if the terms are accepted, the church will probably experience continuing financial obstacles due to the business loan covenants.

(4) Church Financing Difficulty Number Four: Construction, renovation and land acquisition are even more difficult for churches to finance than purchases or refinancing. As a result, needed repairs are often postponed indefinitely and new churches frequently take many years to become a reality.

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 Loan Financing Approach Number One: Non-Recourse Church Loans (replacing individual guarantors). The willingness to eliminate individual guarantors is likely to require a non-traditional church lender. With this church financing approach, church lending will not depend on individual guarantors.

(2) Church Financing Solution Number Two: Long-term loans (up to 30 years). A church loan will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically).

(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 based upon a rate in the range of prime plus 1%, church loan payments will be reduced dramatically. In combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements.

(4) Church Loan Financing Approach Number Four: Church loan financing minimum of $500,000. This larger loan size permits a church to finalize church financing in one step.

(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 Strategy Number Six: Church loan financing possibilities should include purchase, refinancing, new construction, renovation and land acquisition. With comprehensive church financing, it will not be necessary to postpone critical church loan financing requirements.

Collectively the six church financing solutions described above should benefit a large number of churches by allowing refinancing with much better financial terms and by facilitating the construction of new churches on an accelerated timetable. The six church financing solutions are likely to result in improved financial terms that are conducive to the long-term financial health of the churches which take advantage of these suggested church loan solutions.

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

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