How can churches get the commercial loans they need, and why are these loans often so difficult to obtain? There are hundreds of thousands of houses of worship throughout the United States, and, in the majority of these establishments, there are devoted congregations, dedicated leaders, and plenty of donors. So, what’s the problem? Churches are unique in many ways, and these key differences impact their fundability. It’s critical that the leaders of churches, temples, and other houses of worship understand the inherent challenges they face and learn how to overcome them in order to get the funding they need to grow and thrive.

The Challenges of Obtaining a Church Loan

There are several unique issues that generally make it hard for a church to qualify a traditional bank loan:

1. A church’s buildings and grounds are very unique and often purpose-built for worship. Consider the church you last attended. Could this property quickly and easily be used as something else? Probably not. Most likely, significant renovations need to take place first. This means that, if you take out a church loan to build a new church, and later default on your loan, your bank would have to A) spend a significant amount of money to renovate the church into a property that’s more widely useful in order to sell it or B) try to find another religious establishment willing to purchase the building. While houses of worship are plentiful, there are considerably fewer that are looking to relocate to new properties.
2. Many churches are classified as nonprofits and exist as small, community-based organizations. As any commercial lender or borrower will tell you, a personal guarantee is often necessary for small (or new) businesses that want to borrow money. More and more, lenders are requiring that anyone with at least a 20% ownership stake in the company personally guarantee a loan. In fact, when the Small Business Administration guarantees a loan, it now has this same requirement.  A personally guaranteed loan is an unsecured one, meaning you don’t need to put up collateral. But if your business defaults, the bank can come after you and your personal assets in order to recoup its losses. That said, because a church’s leadership (which often includes a priest or pastor as well as a board of directors) generally does not have a personal stake in the organization, a guarantee is often not to secure. Sometimes, members of a church step forward to personally guarantee a loan. However, given that church members may be unwilling to serve in this capacity and, even if they are, may not have the net worth required to back a large church loan, this is a barrier that’s difficult to overcome for many religious organizations.
3. Churches may need the funds for unique reasons, such as for the purchase of equipment used in worship or the building of a sanctuary, which banks may be reluctant to fund because, as mentioned above, the items may be difficult to resell in the event of a default. Churches may also not have the meticulous records banks generally look for and they may lack financially savvy boards of directors. And, while churches may have plenty of donors, those donors may not have very deep pockets. Consequently, churches in poor areas that most often need loans for building repairs and other issues may have the greatest difficulty obtaining them.
4. Further complicating matters, traditional lenders very often don’t understand or appreciate your church or temple’s unique financial structure, challenges, needs, and cash flow situation. They are generally unwilling to take the time to get to know an organization and simply offer unfavorable loan terms or deny the loan altogether based on the church’s inability to meet standard lending criteria. This one-size-fits-all approach is difficult for many small businesses to deal with, but for a church, the challenges are magnified because its leaders may not be skilled entrepreneurs with the time and knowledge needed to properly prepare and “sell” the organization’s loan application.

Surmounting Church Financing Difficulties

To overcome the church loan challenges you may face, you should first look for lenders with a great deal of experience working with small, community-based organizations (especially churches). Rather than working with traditional bank loan officers, a church is generally better off approaching a broker, who often has access to hundreds of lenders and, so, is in the position to shop around for the best possible loan that meets your organization’s unique needs and situation.

Get things organized: Keep meticulous records on your donor history, ministry activities and objectives, and organizational history. Organize a board of directors and meet regularly. New churches and smaller organizations pose bigger risks to lenders, so the more detail you can provide about your organization, how it operates and how it’s financially supported, the better. You’ll also have a better chance of getting a more favorable rate.

Be clear and concise about your needs, plans, and goals: Prioritize your funding needs. Perhaps it’s better to refinance a loan with difficult-to-manage terms than it is to take out a loan to build a new rectory right now. Maybe building repairs are more critical than an expanded parking lot. A new roof might be more important right now than new stained-glass windows. Does it make more sense to expand your existing footprint or build an entirely new facility? It’s critical that you ask these questions.

Know your way around funding challenges: Being aware of and understanding certain types of options and packages could give you a better chance of hearing “yes,” from your lender. For example, a non-recourse loan would allow you to forgo traditional guarantor—though you’d have a higher interest rate and less borrowing power as a result.
You should also opt for the longest loan terms possible, which will improve your cash flow and make the loan easier to pay back. Of course, it would be ideal to obtain a loan with a long repay term and a low interest rate. However, this would probably only be an option if your church has a history of paying on time in the past.

Though it seems counter-intuitive, asking for a large amount could give you a better chance of having your church loan approved. This is because if you choose to make improvements, for example, the bank would prefer those improvements are all complete so that, in the event it needs to take possession of the property, it would be better positioned for quick resale.

Luckily, if you work with a broker that also serves as a financial advisor, you’ll benefit from the best of both worlds—someone who can look at your finances and organizational structure and advise you on how to position both optimally to get the best loan terms on a new loan.