"Preparing For Your Ministry Loan"
Preparing for the funding process can be a challenging task for any ministry. Most church and Christian school leadership have little experience with the financial markets which increases the risk of obtaining sub par results. There are several key factors that ministries should address before they begin their search for help from financial institutions. These factors strengthen the ministry’s position and presentation and will help to insure that you get the best and save the most.
Financial Statements
Financial statements are the primary documents that lending institutions assess when determining if they will lend. If these documents are poorly prepared, red flags immediately go up in the minds of bank underwriters. What begins as a friendly overture of help turns into something akin to an IRS audit. In the minds of lender he level of financial preparedness directly speaks to the level of financial sophistication and accountability. When the lender is presented poorly prepared financial statements the financial accounting and bookkeeping processes are suspect. It is best to avoid any question regarding the accuracy of the statements or the process that leads to their formation by insuring that the Profit & Loss Statement and Balance Sheet are properly prepared. Using a CPA to assess financial statements is a wise step prior to submission for lender review.
Budgets and treasurers reports are fine for internal use, but are not adequate for securing financing from lending institutions. Lenders require that internal financial statements adhere to industry standards as set forth by GAAP (Generally Accepted Accounting Principles). GAAP speaks to both the format of financial statements and to acceptable processes of accounting for revenue and expense and assets and liabilities.
Based upon the size of the loan amount lenders themselves will have varying standards regarding reporting. For smaller loans internal reports may be sufficient if those reports demonstrate adequate financial detail. For larger loans or for churches that have not demonstrated adequate financial statement preparation the lender may require statements that are either compiled, review, audited. Each of these three levels requires the services of a CPA and increases the level of assessment and verification of financial data. The acceptance of internally prepared financial statements will substantially save the ministry the expense associated with hiring a CPA to prepare financial reports.
Financial Software
Demonstrating financial proficiency begins with utilizing an industry standard accounting software package like QuickBooks. QuickBooks has become an industry standard and I highly recommend it. The reports generated by QuickBooks such as the Profit & Loss Statement and Balance Sheet are easy to create and widely accepted by financial institutions. Several easy to record General Journal entries are required at the end of the year to insure the Balance Sheet foots from year to year but other than this the reports are self generating and easy to read. This leads to the other key to good financial reporting preparedness.
Financial Expert
I recommend that ministries have at least on person, either on staff or volunteer, who knows the accounting software and takes responsibility for the accuracy of financial statements. This person does not need to be an accountant, but does need to be proficient with the chosen accounting software and have some working knowledge of bookkeeping. In most cases, a CPA is not needed to prepare annual statements but the ministry should have a working relationship with a financial expert who can be called when accounting questions arise.
Financial Liquidity
One of the most commonly overlooked underwriting criteria for lenders is the borrowers is liquidity. In other words, the amount of cash reserves the ministry has on hand. Lenders require a sufficient cash reserve that can be used as a “construction down payment,” to off set unforeseen expenses during construction, or to provide support for debt coverage.
This is especially critical for the first buy or built for a new congregation. Imagine the purchase of First Baptist Church’s first site. The cost for land and building is $1.5 million. Everyone is excited over the soon to be realized of occupying their first campus until the lender informs them that they cannot borrow 100% of the purchase price. In fact, limited by a 70% Loan to Value the Church must have no less than $450,000 in cash reserve to complete the purchase.
Liquidity is a major concern for any ministry planning for future development. A lack of planning here may result in the failure of the project itself.
Financial Consultant
Strategic planning gurus have convinced us all that “doing the right things” is the right thing to do. But doing the right things in the right order is equally important.
Completing a Feasibility Study or Financial Review to establish borrowing limits and debt service capacity is the right thing to do before you do anything else. If you begin with architectural drawings first and prepare plans that are beyond your ministry’s financial capability, you may hurt the hearts of your followers and discredit yourself. Turn to a financial consultant to complete these studies in order to firmly root your project within reality limits.
A Financial Consultant should be consulted as early on in the development process as possible in order to establish the size and scope of the development project. Once a predevelopment plan has been formed, a financial professional should be retained to secure financing for your ministry. Most ministries do not have a highly experienced mortgage expert within their ministry ranks to assume the task of engaging lending institutions nor determining the best funding option available, so a financial profession should be consulted who can save the church money, time, and hassle.
Financing is the one area of development that ministries feel that they can handle themselves. The ministry may get a “yes” from a lender, but did they get the “best, yes”? A mortgage consultant has an extensive knowledge of the commercial mortgage market, which is significantly different and more complex then the residential market, which is where most ministry leadership gained their mortgage experience. In addition, Ministry lending is an entirely different market and ministry lenders offer unique loan programs that most ministry leadership are not familiar with. Ministries spend considerable time of choosing the right builders their new building and equal effort should be allocated to secure the right financial consultants as well. A bad mortgage will cost your ministry just as much as a poorly constructed building, except the mortgage does have a warranty like a build. To insure you get the very best the financial markets have to offer, consult a mortgage consultant who knows the financial market and has identified church friendly lenders to serve you. It may save you, a lot!
Conclusion
Everyone plans. Either you plan at the time or you plan ahead of the time, but you will plan. When serving God’s vision for your ministry and when stewarding God’s funds given through his people you really need to plan ahead of the time. Prior planning and preparation will insure a better end result while maximizing cost savings and achieving the goal in a timely manner. One of the first and most important steps is financial planning and preparation. Don’t make it your last step … that misstep could be very costly to your ministry.
Posted July 17, 2007
By: David Dennison |
