Choosing the Right Lender for Your Project

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JH Batten & Custom Sound Designs | Raleigh First Assembly | Raleigh, NC

By Jon Huskins of Crossbridge Funding Group
Provided by NACDB Member: Kurt Williams from T&W Church Solutions

Churches and Nonprofits: Preparing for Financing or Refinancing

While the Great Recession of 2008-2009 may seem like something of the past, the reality is we’re still living with its consequences. In fact, it greatly impacts today’s economic environment.

In 2008-2009, many businesses failed. This resulted in foreclosures and high unemployment rates. At the same time, real estate values collapsed—and banks, in particular, sustained tremendous losses. This economic slowdown was fueled by increased regulatory scrutiny, fewer available loan sources and more conservative lending practices.

While the economy is in better shape today, Jon Huskins, President of Crossbridge Funding Group, says the effects of the Great Recession are still felt today.

“Not surprisingly, our nation’s economic recovery has not been speedy,” Huskins says. “It takes years to recover from economic downturns.”

The Turning Tide of Lending

For the first few years after the recession, loans were hard to obtain and the underwriting process was an even more rigorous process than normal. Now, several years later, banks are more confident in the market. It’s a great time for churches and other nonprofit organizations to refinance or move forward with building projects.

“Banks are still conservative in their lending practices,” Huskins says, “but they are eager for good quality business—and churches are the ideal client.”

He says that with banks competing for business once again, bank liquidity is high and churches can get loans at attractive interest rates. He cautions churches to conduct a thorough review of banks.

“Churches shouldn’t just be looking for a loan, but a funding partner,” explains Huskins. “With more options today, churches should evaluate their choices carefully—not all lenders are the same.”

He points to Luke 14:28-30 as a guide: “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, ‘This man began to build and was not able to finish.’”

What Church Borrowers Need in a Bank Partner

There are a variety of loan sources, including banks, credit unions, denominational lenders and bond companies. Huskins recommends that churches ask potential partners about the following:

  • Experience with nonprofit lending
    •    Volume of church loans closed during the past few years
    •    Underwriting guidelines critical to the decision-making process

The cheapest deal is not always the best deal. In fact, a quality relationship with the bank is as important as the loan itself. A good way to gauge the bank, Huskins says, is by evaluating if the bank is more concerned about their policies or your vision.

How Potential Borrowers Prepare

In order to prepare to move forward with financing or refinancing, churches should:
•    Know how much money you will need
•    Focus on telling a compelling story
•    Professionalize financial statements
•    Model debt impact on operations to avoid debt bondage

The most important element of preparation is the loan package. It should include:
•    Loan purpose and desired loan structure
•    Church history and governance information
•    Organizational documents
•    Financials for the prior 3 years (Banks prefer CPA-prepared statements.)
•    Existing debt schedule
•    Attendance trends for prior 3 years
•    Current operating budget
•    Capital campaign information and results

Additionally, if you’re seeking a construction loan, include the following:
•    Description of build team
•    Background information for builder and architect
•    Copy of the construction contract
•    Plans and specifications
•    Construction schedule It takes time to pull together a comprehensive loan package.

Churches should use available expertise—both internal and external—to prepare.

How Banks Analyze Loan Packages

Just as churches are evaluating lending partners, they, too, are being evaluated and, specifically, their loan packages. Lending partners evaluate the viability of a loan request based on the strength of church leadership, governance processes and the quality of financial statements.

“Documents are judged on whether they are internally or CPA-prepared, as well as whether they are compiled, reviewed or audited,” says Huskins.

Additionally, key bank underwriting guidelines are applied to the evaluation. Specifically, banks assess:
•    Deposits and loans
•    Debt coverage ratio – 1:1 or higher
•    Debt as a multiple of the operating budget – 3 times
•    Debt service as a percentage of the operating budget – <33%
•    Loan to value ratio – 75% to 80%

In addition, lenders analyze church loan packages by other financial considerations, including the number of giving units, attendance trends, prior capital campaign experience, and the dollar amount that the top 15 givers contribute to total operating budget.

Upon Loan Approval

Once the loan is approved, the church will receive a commitment letter that outlines the loan approval. The letter will outline:
•    Debt coverage requirements and frequency of testing
•    Bank approval of additional borrowing
•    Prepayment penalties
•    Financial statement quality and reporting requirements Huskins says to look for key loan covenants that may restrict certain areas of operations.

Lender Selection

In order to avoid the potential hazards incumbent in the lender selection process it is imperative to focus on the following critical steps.

7 Tips for Preparing for Financing

1.    Research banks that serve the nonprofit market.
2.   Don’t approach banks too soon—take the necessary time to prepare.
3.   Model the impact of debt on operations and ministry.
4.   Know the desired loan amount and structure.
5.   Understand the difference between commitment and terms letters.
6.   Avoid prepayment penalties.
7.   Avoid excessive fees and understand closing costs.

The selection of the right banking partner will have implications far beyond the completion of a building project or loan refinance.  The bank selected will not just be the church’s lender but a partner that potentially defines the ministry the church ultimately pursues.

Jon J. Huskins is the President of Crossbridge Funding Group, LLC. He can be reached at 317-514-0262 or jhuskins@CrossbridgeFunding.com.

This Article has been supplied to you by T&W Church Solutions as part of our effort to provide growing Churches in our region with relevant information to enhance their ministries and to reach out more effectively to those who do not know the Lord.

Kurt Williams, NACDB CCC, LEED AP, is a Design/Build veteran at T&W Church Solutions with over 25 years in the industry, 20 of those years guiding over 100 churches through the various stages of Planning, Designing and Building their new facilities.  T&W Church Solutions is a Design/Build firm who partners with ministry-focused architects to serve the churches of Central Indiana as well as the only NACDB (National Association of Church Design Builders) Certified Firm in Central Indiana.

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