Church Financing Options - Church Loan Difficulties

Church loans are probably the most difficult form of commercial financing to successfully close. Churches are an integral part of local communities, so it is necessary to improve church financing solutions. In most situations church loan financing will require a specialized type of commercial real estate loan that is not understood by most church loan advisors and borrowers.

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 Key Church Loan Problems

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 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 Loan Obstacle Number Two: Commercial lenders usually require individual guarantors for church financing, and this is inappropriate for a church loan. The financial and legal structure of churches is at odds with a traditional lender/guarantor agreement. Many commercial lenders are not comfortable with the potential lack of individual guarantors because of the difficulty of reselling the church property if negative financial circumstances occur in the future.

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 Financing Difficulty Number Three: When church financing is obtained, there are frequently unacceptable terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the church loan being declined, and if the terms are accepted, the church is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.

(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 Practical Church Financing Solutions

There are common-sense financing solutions for the church loan issues described above. Here is an overview of church financing that is now available from some non-traditional lenders:

(1) Church Loan Strategy Number One: Non-Recourse Church Financing (to replace private guarantors). The ability to not request private guarantors routinely requires a non-traditional commercial lender. With this church loan financing strategy, church financing will be independent of private 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 prime plus 1% and lower, monthly church loan financing requirements will be reduced. Combined with a long-term church loan, the resulting lower payment will make a significant contribution to improvements in church cash flow.

(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 Financing Approach Number Five: Higher LTV (75%-85% is possible). This produces a realistic amount of 15% or so (compared to 50% scenarios with much church financing) for the non-financed portion in refinancing or purchase down payment.

(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.

The six church loan approaches described should benefit most churches by facilitating the new church construction on an accelerated timetable and allowing refinancing with better church financing conditions. The six church loan financing approaches should result in financial covenants that will contribute to the long-term financial profile of prudent churches which adhere to the church financing approaches suggested.

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

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Contact Steve Bush at AEX Commercial Financing - Business Loan Group for commercial mortgage loan - working capital management solutions

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