Common Loan Pitfalls Churches Must Avoid

July 14, 2017 | Posted by Paige Cissell

When planning for and securing a congregation loan, you must consider all the possibilities. While it is an exciting time for your church when the congregation and leadership decide to make improvements or expand, there are problems that can arise. There are both internal and external factors that can affect the success of the loan process.

Let’s review these issues and how they may be avoided.

Internal factors

There are various issues that may arise within the church before and after securing a loan.

Defaulting on a loan is simply one of the worst things that can happen during the course of a project. How do you default on a loan? You find yourself defaulting on a loan when you overextend yourself to the point where you no longer have the funds to pay the loan back.

So, how do you avoid this? By planning ahead, and following that plan, you will provide greater flexibility to address any unexpected events that may occur.

LCEF’s Vice President – Loan & Credit Review, Sandy Sauter, has something very important to say about this:

“When planning a project, carefully gather all information necessary to create a detailed budget. Once the project cost is known, get an assessment of how much equity can be put into the project. Whether it is from reserve funds, or through a capital campaign, every dollar not borrowed frees up those resources for growing the ministry. Then, carefully review how much is needed to make the loan payments. If this added expense cannot be managed within the existing budget, it may be necessary to delay the project until additional revenues are identified and secured.”

One of the main things to consider is that the size of the church staff corresponds to the growth of the congregation. Basically, project what the growth of the congregation will be, and hire appropriately so that you have the right amount of funds to support the staff and still stay on track with paying back the loan on time.

Not being transparent is another mistake the church can make when taking on a project involving a loan. The congregation always has the right to know the church’s financial situation. The congregation’s tithes and offerings often go toward church improvements, so not keeping them informed can a huge mistake.

Church finances should not be kept as a secret or as proprietary information. Not being transparent can cause conflicts within the congregation and between different church groups, including the church council, board of elders and leaders, which ultimately leads to a loss of trust among congregation members.

Part of this transparency of information includes making the congregation fully aware of the ministry successes. Oftentimes, success within the church uplifts and motivates its members and, therefore, compels them to want to help even more.

The primary external factor

Issues that the church has no control over may also cause problems with servicing a loan.

An economic downturn is the main external factor that causes unexpected hiccups. When the economy takes a dip, people may move, make less money and some even lose their jobs. Economic downturns often mean that members of the congregation are not able to give as they once did.

Changes in the economy cannot be predicted with certainty, and, yes, it can cause some major headaches, but you can plan ahead for situations like these. Setting aside additional funds in the church budget will alleviate pressure when or if the economy takes a turn for the worse.

Every church has an annual budget, and there are a lot of variables to consider within that budget. A church cannot rely heavily on offerings or planned gifts (estates of members) or the economy consistently growing year after year. Be conservative with your projections, always plan ahead, don’t over estimate your cash flows and expenses and remember to keep the importance of prayer in mind.

It is always a nice feeling to know that your church is secure in its funds and has the means to pay for expansion and improvement projects.

Interested in completing the groundwork necessary before you and your LCMS congregation, school or registered service organization (RSO) can truly move forward with your vision? Learn more here.

Paige Cissell
I’m Paige Cissell, LCEF’s Marketing Intern this summer! I am a junior at the University of Missouri majoring in Journalism with an emphasis in Strategic Communication. I love traveling, writing and spending time with my family and friends.