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Church Financing Options - Church Loan Difficulties
By Stephen A. Bush
A church loan is likely to be the most difficult type of business loan to complete successfully. Since churches are an integral part of local community infrastructures, it is important to explore all church financing options. A typical church loan will require strategies involving unique commercial real estate financing that is not easy to locate.

A typical church is certainly different from a typical business organization. Nevertheless churches have complex commercial financing needs. This article includes an overview of four major church loan difficulties with a summary of six practical church loan financing approaches.

Four Critical Church Financing Obstacles

Before looking at different strategies for church financing, it is important to discuss typical church loan barriers. A typical church loan will be difficult to arrange due to four primary factors:

(1) Church Loan Obstacle Number One: Churches are usually extremely unique. Because of this, typical commercial lenders are concerned that if commercial mortgage payments are not maintained, it will be difficult to sell the property due to unique property aspects.

(2) Church Loan Obstacle Number Two: Commercial lenders usually require individual guarantors for church financing, and this is inappropriate for a church loan. The financial and legal structure of churches is at odds with a traditional lender/guarantor agreement. Many commercial lenders are not comfortable with the potential lack of individual guarantors because of the difficulty of reselling the church property if negative financial circumstances occur in the future.

It is unfortunately very common for church financing to have been secured only after church members have authorized an individual guarantee for church financing. The need for individual guarantors acts as a serious barrier first because church members might be unwilling to do so and second because there might not be individuals who have enough financial resources to provide an individual guarantee for larger church financing needs.

(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 Financing Barrier Number Four: Renovation, construction and land acquisition are frequently more difficult to get approved than church purchases or refinancing. Due to this, repairs are often postponed and new churches commonly take several years to complete.

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 Strategy Number One: Non-Recourse Church Financing (to replace private guarantors). The ability to not request private guarantors routinely requires a non-traditional commercial lender. With this church loan financing strategy, church financing will be independent of private guarantors.

(2) Church Loan Strategy Number Two: Long-term church loans up to 30 years. Church loan financing will be more successful when it is not short-term (much lower monthly payments are likely).

(3) Church Loan Strategy Number Three: Lower interest rates. Churches have frequently been taken advantage of and have paid higher interest rates than necessary.

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 Strategy Number Four: Minimum church financing set at $500,000. This encourages churches to finish most business financing in one stage.

(5) Church Loan Financing Approach Number Five: Higher LTV (75%-85% is possible). This produces a realistic amount of 15% or so (compared to 50% scenarios with much church financing) for the non-financed portion in refinancing or purchase down payment.

(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.

Stephen A. Bush and AEX Commercial Financing Group, LLC will provide candid commercial real estate loan advice. Sign up for free Commercial Financing reports
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