Lending to Churches

By Eltringham, David A. | Journal of Commercial Lending, April 1994 | Go to article overview

Lending to Churches


Eltringham, David A., Journal of Commercial Lending


Three reasons explain why lending to churches can be advantageous to a bank:

First, banks' loss experiences with church lending have been minimal.

Second, financing churches can pave the way for fruitful, long-term relationships that extend beyond traditional lending. In the past, banks have provided churches with checking accounts, cash management services, and, occasionally, investment services and working capital lines of credit.

And last, church loans tend to be highly visible transactions that enable banks to interact with church finance committees and board members, which can result in increased penetration into local communities. This interaction fosters community goodwill and provides the bank with ample opportunities to court congregants as bank clients.

The bulk of bank lending to churches is term loans for capital improvements such as construction of larger sanctuaries and educational facilities, which can include day-care centers.

Dealing with churches, however, is a challenging proposition that can cause a lender some discomfort. Churches usually have unsophisticated financial structures and complicated decision-making processes. Furthermore, a lender might be reluctant to take any action on a church that defaults on a loan; the prospect of doing so is, among other things, a public relations nightmare.

Initial Screening and In-Depth Follow-Up

A bank may want to limit its exposure to churches with more than 100 giving units -- individuals or groups, such as families, that contribute to the church. As a precursor to a full-fledged credit investigation, a lender should do a thumbnail assessment of the proposition. The following questions may be helpful in determining whether a credit request should be denied out of hand or followed up:

1. Is the church composed of congregants in a "mainstream" denomination?

2. When was the church founded? Churches less than 10 years old are high risk. The age of a church, however, should not be the sole determinant in the decision to extend or deny credit; the risk that a younger church represents can be mitigated with protective loan structures and covenants, the value of collateral, and confidence in secondary sources of repayment.

3. How strong are the church's finance committee and board or governing body?

4. Historically, has the church demonstrated an ability to generate capital funds through fund-raising efforts?

5. Has it exhibited an ability to retire debt on a scheduled basis?

6. Has it shown steady growth of membership and revenue?

7. How stable is the congregation and the staff? This assessment may be difficult to do quickly, but a lender should formulate an overall opinion of the people who make up the church. A general evaluation may reveal if trouble exists in the form of, say, turmoil among the worshipers or potential splinter groups among the congregants.

8. What is the church's budget? Ideally, the church should be able to demonstrate a historic variance of 3% (or less) from its budget.

9. How much does the church depend on outside financial assistance? Strong churches will receive less than 15-20% of their revenues from sources other than its organization.

10. If the requested funds are for capital improvements, what is the reputation of the contractor involved? Are bonds in place to cover the contractor and any subcontractors? Have plans been drawn by reputable architects? Have environmental issues been addressed? Are appraisals up to date?

If the credit request passes these criteria, the lender can proceed with a more in-depth analysis. This investigation should include an assessment of:

* Staff.

* Church leaders.

* Demographics of the congregants.

* Denomination.

* History of the church.

Staff

It is imperative for a lender considering a loan to a church to understand the strengths and weaknesses of its staff. …

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