H E L P I N G L E A D E R S B E C O M E B E T T E R S T E W A R D S .

Presented by: America’s Christian Credit Union

BasicChurch Finance

CHURCH EXECUTIVE • B A S I C C H U R C H F I N A N C E2 churchexecutive.com

B A S I C C H U R C H F I N A N C E • CHURCH EXECUTIVE 3churchexecutive.com

Table of ContentsBEHIND THE LOAN APPLICATION: WHAT IS THE BANK OR CREDIT UNION REALLY LOOKING FOR? 4Developing a strong and trusted relationship with your lender can provide your ministry with competitive financing options, access to capital, and a reliable source of advice on financial matters. As your ministry looks to begin a relationship with a lender — or maybe improve an existing one — having insight into the mind of a lender will help you develop this vital partnership.Here are five strategies your potential lender is sure to appreciate

By Darren Thompson & Richard Koon

A POINT-BY-POINT GUIDE TO COMPARING LOAN OFFERS 5Church leaders are often surprised to hear that the terms and conditions of a church loan are significantly different than residential mortgages. Since churches are organizations, the loans they obtain are considered commercial loans. Commercial loans are structured differently and have different requirements than a homeowner might get for his or her personal residence.Before your church obtains a loan for a new building purchase or construction project, it’s important to understand the differences — in other words, how to compare the different loan offers whichlenders present.

By Darren Thompson & Richard Koon

KEY FINANCIAL RATIOS BEHIND THE LOAN DECISION — FROM THE LENDER’S PERSPECTIVE ... Coming in October 2016

CHURCH EXECUTIVE • B A S I C C H U R C H F I N A N C E4 churchexecutive.com

BEHINDthe loan applicationWhat is the bank or credit union really looking for?By Darren Thompson & Richard Koon

Developing a strong and trusted relationship with your lender canprovide your ministry with competitive financing options, access tocapital, and a reliable source of advice on financial matters. As yourministrylookstobeginarelationshipwithalender—ormaybeimproveanexistingone—having insight into the mind of a lenderwillhelpyoudevelopthisvitalpartnership.

Herearefivestrategiesyourpotentiallenderissuretoappreciate.

#1: Prepare an annual budget. Your budget should be a realistic and conservative roadmap for the year ahead. Although your ministry might have plans for growth, we recommend establishing a budget that reflects previous years’ financial performance. Rather than being based solely on last year’s numbers — or on projected growth for the year ahead — your budget should demonstrate a clear understanding of the financial trends of the church based on a three-year history. The budget process allows the church to make strategic decisions about goals, objectives and issues affecting various ministries that might need financial support. Knowing that you have a plan for the good days and the rainy days provides your lender an understanding of the financial abilities of the church and those who manage the finances.

#2: Operate at break-even or better. Creating a budget with a 10- to 15-percent margin allows the ministry to operate at break-even (or better) and keep expenses lower than income. When your ministry produces positive cash flow, you create a sustainable operation that can handle the fluctuations that nonprofits typically experience.

#3: Build liquidity. Cash is easy to spend, but tough to accumulate. When you create a budget and stick to it, the ministry will generate cash by keeping expenses below revenues. Building cash reserves is not just a sound financial management principle; it also provides the ministry with a safety net. Cash reserves allow the ministry to continue regular operations, even when unexpected events happen or as monthly cash flows fluctuate beyond the normal ranges.

#4: Understand fixed expenses. Knowing your fixed expenses is important because it helps facilitate the conversation around what is discretionary. Mortgage payments, insurance and staff are a few examples of fixed expenses that the ministry must meet every month.

However, it’s important to understand which expenses are able to be quickly eliminated or reduced should the ministry encounter lean

times. During the Great Recession, ministries were scrambling to reduce expenses as income dropped. Developing a plan demonstrates sound financial management to your lender, the Board and your congregation.

#5: Exhibit leadership and oversight. Although most churches are started (and sustained) on the spiritual vision and leadership of the senior pastor, a lack of leadership and oversight in the financial office can be very costly. It’s important for churches to establish a structure that supports transparency and shared leadership when it comes to money matters. Church boards should include non-related members with the skills and experience needed to provide guidance and oversight to the pastoral staff. This could also include additional checks and balances provided by independent committees who help develop operational budgets and periodically review the church’s financial statements. A proper leadership and oversight structure will provide protection for the pastor, adequate oversight, shared authority, and a commitment to transparency.

Ultimately, lenders want to feel comfortable that your ministry has the planning, the processes and the protocols in place to manage the church’s financial operations. Presenting a budget, operating at a surplus, building cash reserves, and having a detailed understanding of how the cash flow of your ministry works will go a long way to getting you the best rates and terms.

And if you find the right lender, you will have a trusted partner who is aligned with your values and can be relied upon as you reach for your ministry goals.

Darren Thompson is Vice President of Credit Services for America’s Christian Credit Union in Glendora, CA www.americaschristiancu.com.

Richard Koon is Vice President of Ministry Lending for America’s Christian Credit Union in Glendora, CA.

B A S I C C H U R C H F I N A N C E • CHURCH EXECUTIVE 5churchexecutive.com

A point-by-point guide to comparing loan offersBy Darren Thompson & Richard Koon

Church leaders are often surprised to hear that the terms and conditions of a church loan are significantly different than residential mortgages. Since churches are organizations, the loans they obtain are considered commercial loans. Commercial loans are structured differently and have different requirements than a homeowner might get for his or her personal residence.

Before your church obtains a loan for a new building purchase or construction project, it’s important to understand the differences — in other words, how to compare the different loan offers which lenders present.

Term: Would you be surprised to find out that commercial loans do not have a 30-year term with a fixed rate for the entire length of the loan? Commercial loans have a shorter term of three, five or 10 years. Since payments are amortized over a longer period, the mismatch between the term and the amortization schedule means the loan will not be fully repaid at the end of the initial term. This creates a balloon payment, where the church will either pay off the remaining loan amount or refinance the amount for a new term.

As such, you should discuss what will happen if the economy weakens or if your church is going through a transition. Will there be additional fees? It’s important to understand what is expected of your church at the end of the initial term, as well as what to expect from your lender.

Fees: We’ve all heard the radio or television ads promoting a mortgage at “no cost, no fees.” Unfortunately, commercial church loans are not free, and you should carefully evaluate the costs that lenders charge to originate a loan. Depending on the size of your loan request, your church could pay several thousand dollars in origination fees, appraisal costs, loan costs, document fees and other related costs.

The good news is that fees can vary from lender to lender. So, it’s important to shop around and get the best deal for your church.

Rate: Residential mortgages come with a long-term fixed interest rate of 30 years, in most cases. Commercial church loans could see a fixed rate of several years, but it will likely adjust or reset at some point during the term of the loan.

As you evaluate loan offers, it’s important to know how the rate will reset (normally a spread to an index such as Prime or Treasury rates), and how often / if it can adjust up and down if rates were to go lower. Many lenders are becoming wary of rising interest rates, but some will still consider adding an interest rate cap to limit the amount of the rate adjustment for the church.

Relationship: With rates at historic lows, we see more lenders entering the church market. Church lending is a specialized field; if you choose to

partner with a lender without enough experience, you could be in for a bumpy road. Make sure your lender has a long history in serving churches and is committed to churches in good times and bad.

Many times, you can see a lender’s commitment by the staff it hires and the depth of expertise displayed in its church lending operations. Working with experienced church lenders might provide compassionate and valuable counsel during a transition, a downturn, a building campaign, or countless other issues that can affect a ministry. Unlike a residential mortgage, your church will be closely engaged with the lender for many years to come. At a minimum, you will be expected to provide annual financial statements, proof of insurance and updates on leadership changes. The church should consider who they like doing business with and if the church’s mission is consistent with the lender’s mission. Many churches prefer to partner with a local lender because that lender is involved in the community, much like the ministry. It’s important to choose a lender which understands your ministry and proves to be a partner through every season of the church’s life.

As a matter of stewardship, your church is obligated to seek the best possible terms and rates and to negotiate the lowest fees. However, when you evaluate loan offers, it’s important to consider the value provided by the lender relationship — the expertise, the affinity, and the long-term relationship that’s created when a loan funds.

Ultimately, your church should select a lender that offers competitive terms, rates and fees, but also one that provides peace of mind over the long term through expert staff and a commitment to providing banking and financing solutions that will help your ministry reach its goals. Darren Thompson is Vice President of Credit Services for America’s Christian Credit Union in Glendora, CA [ www.americaschristiancu.com ].

Richard Koon is Vice President of Ministry Lending for America’s Christian Credit Union in Glendora, CA.