Church Lenders Directory

Refinancing to Grow
Is It Still a Good Option for Churches?

by Therese DeGroot long-term interest rates still relatively low and attendance, membership and programs increasing, many churches are considering refinancing existing debt, and possibly borrowing more to undertake important building projects to accommodate the growth. Does it still make sense to refinance and increase debt in this economic environment? I think the answer is yes. But...

The most important thing to consider in refinancing a loan is the current interest rate on the existing loan and how much money, if any, will be saved by refinancing to a lower rate after you add back costs incurred to refinance.

Refinancing should certainly be considered to fix a floating or adjustable-rate loan while fixed rates are still low. Refinancing almost always makes sense when the proposed fixed rate is at least 1 percent lower than the current fixed rate, and most certainly if you need additional funds for a building, renovation or remodeling project. The project should be considered if it will expand sanctuary seating or increase much-needed parking to accommodate growth, improve daycare rooms to accommodate more children, or enlarge the fellowship area to encourage attendance. Thought should also be given to projects that will update facilities to attract a new or younger demographic market, as well as the overall impact of the project on existing church activities while renovation is underway.

Equally important in this discussion is finding the best financial partner to refinance the existing debt and the building project. Some providers share the common misconception that the market is unsophisticated, unorganized and solely dependent on the arbitrary generosity of donors for repayment of the loan. Inexperienced lenders might structure the loan as a real estate loan and not be mindful of the cash flow nature of churches. This can result in a loan that’s too large for your congregation to debt-service or too small to build out the vision; covenants that are either too restrictive or not relevant to churches; or an interest rate higher than it should be based on perceived high risk.

After selecting your lender, be sure to meet the decision-making team and relationship manager. This way, in the event of turnover, you won’t have to explain your important work again.

In preparing a loan package, presentation is everything. You want to present a well-organized, professional and thorough loan package that represents how important your stewardship responsibilities are. The loan package should include: purpose of the loan, history of the church, vision of the church, budget, capital campaign information, current and three years’ prior historical financial statements, membership/attendance/enrollment figures, overview of your ministry and outreach programs, background on pastoral staff, and brochures, CD, DVD on programs, services, etc.
Lenders want to be sure the church has a well-run business office. Proper accounting and financial systems with appropriate controls and up-to-date technology will ensure accurate reporting and tracking of contributions, members, attendees and donors. It will also help in the preparation of financial statements, capital campaign information and cash management, and will guard against possible embezzlement or fraud.

Audited financial statements will keep the church above reproach in this age of Sarbanes-Oxley and should be seriously considered. Don’t let the cost of the audit be a barrier to making this one of your best practices. When requesting financing, it benefits the church if the lender knows it’s an important part of your stewardship responsibility. The management letter accompanying your annual audit will also give you suggestions for improvements.

In cases in which financing is needed for a building project, a building plan and budget should be developed and submitted to ensure the project can be funded and completed on time and on budget. The budget should not exceed total loan proceeds and cash on hand.

Consider breaking down large building projects into smaller phases. Build what your congregation can afford while continuing to grow ministry and outreach programs. Don’t let the congregation become overburdened with too much debt — a common pitfall many churches face. This stalls the growth of the church as funds are redirected away from programs to pay debt service. Inexperienced lenders often qualify a church for the maximum loan amount based on the value of the real estate pledged rather than on the congregation’s ability to repay the debt from cash flow while growing church programs.

An important part of any building plan is a fund-raising campaign to give your congregation the opportunity to participate in building projects, even small ones. In addition to minimizing the amount of debt required to complete the project, it engages the congregation in the process of growing the church. People will give to expand the vision if it’s a compelling one, not just to build a building. Restating your vision and presenting a well-crafted case with a call to action will provide a solid starting point.

Whether yours is a mega, destination, multi-site, community or neighborhood church, your vision statement reflects its heart. Program development should be incorporated into fund-raising initiatives as well as financial and community outreach goals. You must have congregation and community buy-in, regardless of project scope, to help you accurately determine what both see in terms of the vision of you church. Committing resources to both the execution and follow-up of even a small campaign is important and will serve you well.

A lower rate and the right financial partner will empower your church’s vision. Care should be taken to find a lender that truly understands and supports your unique vision and partners with you through the inevitable ebbs and flows.

For more than 15 years, Therese DeGroot has developed and managed religious lending programs for many banks that now specialize in lending to churches and schools. She is senior vice president of First Bank’s Community First Financial Resources Division. Reach her by writing or calling 866.766.2636. Visit for more information.