By: Bill Wilson
Does your church need money to build? Many do and many pastors and church leaders are asking, “What are our options in financing our new building?”
In a time of high interest rates many are looking for a panacea or a deal that someone heard that another church got. Seldom, if ever, is the panacea found.
Does this mean that a church should not build? Certainly not! In fact, if a church really needs to build, it cannot afford not to build! A delay in building will, due to inflation, almost always increase the ultimate cost of building. However, the greater danger is that delayed building can cause a church to lose its growth momentum. Yet, churches should be wise in building finance planning.
When a church makes a decision to build, the pastor and church leaders must decide among the building finance options. There is no “best option” that is applicable in every case. Each church must discover what is available and best for it. Most churches secure financing from one or more of the following sources:
Traditional Financing
This is the option of a church borrowing from a bank, savings and loan, or other financial institution.
Every church should actively cultivate its relationship with its financial institutions for just such a time as when you enter a building program. It is always best if your local financial institution knows in advance something of your policy, ministry and growth. They will then be more receptive to your proposal.
When your church seeks traditional financing, take the time to prepare a well-planned proposal. The proposal should be attractive. It should include history of the church, resumes of leadership, growth patterns and growth projections, ministries, and financial history and projections. As the loan officer reads the proposals, he should be convinced that the project is needed and the church is a good financial risk.
The advantages of traditional financing, when it is available, are its speed in processing and its relative ease in terms of effort.
The disadvantages are that it will usually cost points at initiation and will usually be at the prevailing interest rate (sometimes with a floating rate). Thus, traditional financing is usually comparatively expensive.
Also, traditional financing is often simply not available to churches. Many financial institutions choose not to put themselves in a position of possibly having to foreclose on a church if the terms of the loan are not met.
Most experts agree that a church can handle a debt of 2.3 to 2.5 times its annual income. A bank will usually take a five-year history and growth projections in determining the average annual income.
Another way to calculate what should be borrowed is to figure that no more than 25 percent of a church’s annual income be pledged for debt retirement.
Church Bonds
A church may choose to contract with a company to sell church bonds secured by a lien on church property. The company will, with the assistance of the church, prepare all the legal documents, print the bonds and help the local church sell the bond to its members and friends. This is known as “best efforts” sales. The company commits itself to give its “best efforts” to sell the church’s bonds.
There is no guarantee that all of the bonds will be sold. However, many bond companies will underwrite and sell a portion of the bond issue to their own outside clients. This underwriting service will probably be priced at a higher rate than the “best effort” service.
The cost of this kind of financing would include points up front to cover all the company’s expenses and fees. Usually about three to five points for “best effort” programs. For a bond issue of $1 million, this one-time charge might be $30,000 to $50,000. In today’s market, the interest rates in bonds fluctuate so much that it is impossible to say at what rate a bond issue might sell for. But it is still usually less than traditional financing.
There are a few companies which offer the option of underwriting all of a church’s bond issue. This means they will guarantee the sale of all of a church’s bond issue to their own investor-clients outside of the congregation. The cost of this more complete service is higher up front to pay for more service and usually a few points higher in interest to make the bond more attractive to investor-clients. However, this type program greatly reduces the involvement and effort of the church. It is very similar to borrowing from a local financial institution.
The primary advantage of financing with church bonds is that such financing is available and usually at a lesser interest rate than institutional financing.
A disadvantage of church bond financing is the usually higher up front cost. It should also be clearly understood that a bond program is a method of borrowing and there will be substantial interest cost.
Membership Loans
A church can determine the amount of money it needs to borrow and invite members to lend money to the church out of their savings. A legal contract and a payment schedule is drawn for each member granting a loan.
This option has been successfully used by many churches. It is true that members will often lend to their church at as much as two to three points less than the market interest rates.
Yet, the complexities of this option are numerous:
*This method almost always has to be supplemented with other types of borrowing. This complicates the methods of securing the loans of church members.
*It demands strong internal organizational support to market the loans among the membership.
*If problems arise, they pit a church member against his church. Related is the axiom: “Never borrow money from family or friends.” Many have had no problems; but if problems arise, they usually are severe.
Capital Stewardship Ministry
This is usually an intensive, organized, consultant-led ministry to inform the church body of the needs and opportunities of the church. The constituents are then asked to consider making an over and above sacrificial commitment to be given over a specified period of time (usually three years).
A good program will emphasize voluntary, proportionate giving. No family should be coerced or told what to do. Each family should be challenged to prayerfully discover and act upon the will of God for their lives related to the building ministry of their church.
A typical three-year program will produce commitments totaling from one and one-half to three times the annual income of the church. Thus, a church with an annual income of $500,000 should anticipate $750,000 to $1,500,000 to be committed and given over and above their regular giving during the three years. Often even more is given. Usually, with a good follow-up program, 96 to 102 percent of the amount committed is received. A follow-up program includes keeping the program before the people, as well as giving every new family the opportunity to participate for the
duration of the program.
The best time for this kind of program is immediately after the decision to build and before other financing is secured.
Costs of this program will include a set fee for consultant leadership (not a percentage of commitments), promotion and printing, and usually a banquet. The consultant’s fee is usually based on the size of the church and on the anticipated consultant expenses.
The disadvantages of a capital stewardship ministry are:
*Most often a church can’t raise all the funds needed and must be combined with other types of financing.
*It requires three to five months and a dollar investment before the final results are known. However, it is extremely rare that a congregation with good counsel will commit less than one and one-half times its annual income.
*Funds are received over a period of time, rather than all at once.
*The program generally is not cost effective in churches with incomes of less then $100,000 per year.
The advantages of a capital stewardship’ ministry are numerous:
*If properly led, it will almost always strengthen the church spiritually by unifying the congregation in working toward a common goal.
*It will spread the base of giving; in the typical church 16 percent of the families give 80 percent of the income. In this type of program, however, it is anticipated that between 65 and 80 percent of the families will participate.
*It can eliminate or reduce the need for long-term debt-saving the church hundreds of thousands of dollars in interest. For instance, if a church borrows $100,000 at 15 percent for 15 years, it will cost $152,000 in interest alone over the term of the loan. Thus, for every $100,000 given that does not have to be borrowed and later repaid, the church receives the $100,000 in gifts plus saving $152,000 in interest.
*A capital stewardship ministry can be combined with traditional financing or a church bond program with no problems.
*Funds from this ministry can be used to pay off other financing early with resultant interest savings or be used to expand the funds available for building.
The best counsel, if you need money to build, is to seek counsel. Consultation from any of these sources of financing is available to your church at no cost or obligation. Consult them all and decide what is best for your church. To find this counsel, ask fellow ministers for recommendations of people they have used, or contact services advertised in Christian publications.
“To every thing there is a season, and a time to every purpose…a time to build…” (Ecc. 3:1,3). If it is “a time to build” in your church, there are options in financing.
Bill Wilson, executive vice president of Resource Services, Inc. of Dallas, Texas, has helped more than 700 churches raise more than $1.5 billion in his nine years in the fund raising business.
(The above material originally appeared in Ministries Magazine.)
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