Churches Borrowing Money: Understanding Corporate By-Laws

When a church needs financial assistance, it may consider borrowing money. However, there are several factors to consider, such as the purpose of the funding, the loan amount, and the interest rate. Church leaders should exercise caution when borrowing from members as it can create unforeseen legal complications and change the nature of the relationship between the member and the church. Before taking on debt, churches should consult legal and financial professionals and carefully evaluate their options to ensure compliance with regulations and informed financial decisions.

Characteristics and Values of Church Borrowing Money

Church loan requirements

When it comes to financing a church project, preparation is critical. Understanding church loan requirements can help your organisation secure the funding it needs. Whether it's a church, temple, religious school, convent, monastery, or other religious property, most religious organisations seek out a loan for church building projects.

Church loan financing might be a fit for the following projects:

• Buying an existing building for the congregation.
• Building a new church.
• Paying for minor repairs.
• Three years of financial statements, like balance sheets and income statements.
• History of the church, like the denomination, background, and location(s).
• Number of giving units (groups, family members, recurring supporters of the organisation).
• If it is a loan for church construction, the lender expects to see the plans and budget for the project.
• Some lenders require collateral to protect their investments in case of default.

Before offering a loan to anyone, a church should consult with an attorney as well as a tax advisor and an accountant to determine whether the loan makes practical, financial, and legal sense.

Who can sign for a church loan?

When a church takes out a loan, it is crucial to identify who has the authority to sign the loan documents. This responsibility typically falls on individuals in key leadership positions within the church's governance structure, such as the treasurer or a board of trustees member. These individuals have the duty to ensure that the loan agreement aligns with the church's financial policies and has the approval of the governing body, such as the vestry or elders, depending on the denomination and governance model of the church.

Before signing a church loan, it is essential to have a clear understanding of the church's financial projections and budget. This involves carefully reviewing any contracts or agreements related to construction projects or renovations to protect the church from potential legal and financial issues. Signing on behalf of a church requires due diligence and responsibility, ensuring that the loan can be repaid without causing undue financial strain on the organization.

Churches may face challenges in obtaining loans from traditional banks or financial institutions due to being considered high-risk organizations. As a result, they may turn to faith-based financial institutions, alternative lenders, or explore options like business credit cards or lines of credit for smaller expenses.

It is important to approach the signing process strategically, with a sound understanding of the loan's purpose and the church's financial capabilities. This includes considering the loan's impact on the church's mission and the potential tax implications of lending money. Before offering a loan to a member, churches should consult with legal and financial professionals to ensure the loan is practical, financially sound, and legally compliant.

In summary, the person authorized to sign for a church loan is typically a key leader within the church's governance structure, such as the treasurer or a board member. They must ensure the loan aligns with the church's financial policies and has the governing body's approval. This process requires careful consideration, due diligence, and a strategic mindset to protect the church's best interests and financial well-being.

Borrowing from church members

Church leaders may view borrowing from members as an attractive alternative to traditional loans from financial institutions, assuming that members will be more flexible with repayment terms. While this may be true in some cases, it is crucial to recognize that not all members can afford to be lenient if the church struggles to make payments or defaults on the loan.

A church's failure to honour its financial commitments, such as promissory notes secured by mortgages on church property, can have severe consequences, including the potential eviction of the congregation from church premises.

Before considering borrowing from church members, it is essential to seek professional advice. Consulting with an attorney, a tax advisor, and an accountant can help determine whether borrowing from members is a practical, financially viable, and legally sound decision. They can assist in evaluating the potential risks and ensuring compliance with tax laws, as income from interest revenue may be subject to income tax.

Additionally, churches should be cautious about becoming lenders to their members. While there may be circumstances where a church is asked to loan money to a member in need, it is important to remember that lending money comes with risks, including the possibility of non-repayment and the need to enforce loan obligations. Churches should not be expected to take on the role of a bank, and they must consider the potential impact on their mission and reputation.

Repaying church loans

Churches can borrow money from financial institutions like banks and credit unions, and they can also borrow from their members. However, borrowing from members can create unforeseen legal complications, and it may be difficult for the church to get the money back if members' circumstances change. Before borrowing money, churches should consult with an attorney, a tax advisor, and an accountant.

When it comes to repaying church loans, there are several strategies that can be employed to accelerate the process and ensure financial stability:

• Creating a budget: Developing a comprehensive budget that outlines all income and expenses is essential. This helps identify areas where expenses can be reduced, allowing more funds to be allocated towards loan repayment. It is important to only borrow what is needed to reduce the financial burden.
• Increasing income streams: The church can explore various options to increase revenue, such as hosting fundraising events, encouraging regular donations, or renting out their facilities. By diversifying their income streams, they can contribute more funds towards loan repayment.
• Allocating surplus funds and windfalls: If the church experiences surplus funds from donations or events, or receives unexpected windfalls (such as significant donations or grants), consider allocating a portion or all of these funds towards loan repayment. This can help accelerate the payoff and reduce the total interest paid over time.
• Establishing a loan repayment fund: Setting up a dedicated fund specifically for loan repayment demonstrates a disciplined approach to retiring the debt. Regularly depositing funds into this account ensures consistent progress in reducing the loan balance.
• Refinancing: Exploring refinancing options can lead to better loan terms. Lower interest rates or more favourable repayment schedules can significantly reduce debt faster.
• Encouraging financial stewardship: Educating the congregation about financial stewardship and their contributions' impact on the church's financial health can foster a supportive environment. Congregants who understand the importance of financial stewardship may be more inclined to give generously, accelerating the loan repayment process.
• Monitoring and adjusting: Regularly reviewing the church's financial position and adjusting the repayment strategy as needed is crucial. This proactive approach ensures that the church can adapt to changing circumstances and stay on track with loan repayment.

Church loan alternatives

Borrowing from members of the congregation is an option, but it is not without risks. Church leaders may assume that borrowing from members is a good option because it is convenient and members may be more lenient than a bank if the church struggles with payments. However, this can create unforeseen legal complications, and some members may not be able to afford to be lenient if the church defaults on the loan.

Before offering a loan to anyone, it is recommended that the church consult with an attorney, a tax advisor, and an accountant to determine whether the loan is practical, financially and legally.

There are alternative financing options available for churches, including:

• Broader church organizations: These organizations are familiar with the church funding limitations and the difficulties churches face when attempting to secure funding. They will often create financing packages that reflect the actual value of a new or renovated church building. Examples include the Wesleyan Investment Fund, Church Development Fund, and Thrivent.
• Individual investors through an external organization: These organizations will meet with you to discuss your project and then put together a package that they offer to investors. Because it is an investment, the investors will expect to be paid interest on what is borrowed.
• Self-funding: This allows the church to have more control over the terms and interest rates. It also invites church members to invest in the church's vision for the future. However, church members who become lenders will not be able to take a tax write-off for the amount they lend.

There are also specialist church loan companies that offer loans to churches with excellent credit and those facing foreclosure. These companies offer competitive rates and terms, and some provide loans for churches with recent credit issues, including those facing bankruptcy.

Frequently asked questions