Church loans are probably the most difficult form of commercial financing to successfully close. Churches are an integral part of local communities, so it is necessary to improve church financing solutions. In most situations church loan financing will require a specialized type of commercial real estate loan that is not understood by most church loan advisors and borrowers.



Churches are not typical commercial enterprises but they do have substantial business financing requirements. This article will offer an overview of four key church loan financing difficulties and a listing of six practical church financing strategies.

Four Key Church Loan Problems

Prior to describing alternative approaches for typical church loan financing requirements, it is important to discuss the typical church financing obstacles. Church loans have historically been difficult to arrange because of several key issues:

(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 not unusual to have a church loan that has been finalized only after several church members have given a private guarantee for church loan financing. The normal request for private guarantors acts as a major difficulty because there might not be individuals who have the necessary net worth to provide a private guarantee for large church loan financing requirements and because church members might prefer not to act in this capacity even if they are financially capable of doing so.

(3) Church Financing Difficulty Number Three: When church financing is obtained, there are frequently unacceptable terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the church loan being declined, and if the terms are accepted, the church is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.

(4) Church Loan Obstacle Number Four: Land acquisition, construction and renovation funding are usually more difficult to obtain than church refinancing and purchases. Because of this, repairs are often postponed and new churches can take years to build.

Six Prudent Church Loan Financing Approaches

There are several prudent business loan strategies for the church loan financing obstacles described previously. Here is an outline of church loan solutions that are available from a select number of non-traditional church lenders:

(1) Church Financing Solution Number One: Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender. This particular church loan solution means that lender decisions will not be based on personal guarantors in any way.

(2) Church Loan Financing Approach Number Two: Long-term business loans. Church financing will produce more effective financial results for the church when it is long-term because payments will typically be substantially decreased.

(3) Church Financing Solution Number Three: Low interest rates (usually a maximum of prime plus 1%). In reality many churches have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options.

With payments based upon a rate in the range of prime plus 1%, church loan payments will be reduced dramatically. In combination with longer-term loans, the overall payment reduction will make a significant contribution to church cash flow improvements.

(4) Church Financing Solution Number Four: Minimum church loan size of $500,000. This allows churches to complete most financing in one step rather than piecemeal over a period of years.

(5) Church Financing Solution Number Five: High LTV (75% to 85% is available). This results in a more workable amount of 15% to 25% (rather than 40% to 50% with a traditional church loan) for the down payment or non-financed portion in refinancing.

(6) Church Financing Solution Number Six: Church loans can now include new construction, renovation, land acquisition, purchase and refinancing. Because of more flexible church loans, it is no longer necessary for these vital church financing needs to be postponed indefinitely.

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.

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