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Church Financing Choices - Church Loan Strategies

By: Stephen A. Bush

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 addressing possible solutions for the most common church loan needs, it is important to discuss the typical barriers to obtaining church loans. Historically church financing has been difficult to arrange for several reasons:

(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 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 Loan Obstacle Number Four: Land acquisition, construction and renovation funding are usually more difficult to obtain than church refinancing and purchases. Because of this, repairs are often postponed and new churches can take years to build.

Six Prudent Church Loan Financing Approaches

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 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 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 Financing Solution Number Three: Low interest rates (usually a maximum of prime plus 1%). In reality many churches have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options.

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 Financing Solution Number Five: High LTV (75% to 85% is available). This results in a more workable amount of 15% to 25% (rather than 40% to 50% with a traditional church loan) for the down payment or non-financed portion in refinancing.

(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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Stephen Bush provides candid working capital business loan - business cash advance advice. Free series of AEX Working Capital Loan - Church Financing reports
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