By Charity Kuehn, Emanate Consulting
When I was a little girl, my grandparents had a friend from Germany named Kurt. Kurt would come to visit them almost every summer. He spoke English but he was difficult to understand; he spoke slowly and in broken sentences. Kurt was the sweetest person and never arrived for his visits without a gift for me—a small toy or doll from Germany or a special candy or chocolate. I loved to hear him talk because he was always so happy, and his accent was so entertaining, but most of the time I had no idea what he was saying.
Why, you ask, am I telling you this story? As I reflect on a few things that I think church leadership needs to consider when they are getting ready for growth or expansion of their facilities, I can’t help but think about Kurt. A language barrier can be such a challenge when two people or groups are trying to work together. I see this type of communication struggle nearly every day when church leadership is working to secure financing for a project for their facility.
For the sake of this article, we are going to consider “Banker” its own language. It’s a language based on acronyms, ratios, and calculations that usually only the banker knows and understands. They may or may not think it important to explain things to their potential church client. It is also a language that, unfortunately, may not offer much gray area for prayer or future vision. I hope that by the end of our conversation, you’ll have picked up some terms that will help you communicate with the banker in your neighborhood.
Breaking the Banker Language Barrier
First Language Lesson
When you prepare to approach a bank, it is important that you have clear, accurate financial data. Your banker will say, “We will need to see three years of your financial statements.” In some cases, they may want to see giving reports and bank statements as well. Be sure you provide them both an income statement (the document that shows your income and expenses each year) and a balance sheet (the document that shows your assets and liabilities) for each year. These statements should balance to each other year over year, carrying forward your net income or loss. These statements need to make sense and allow the banker to look at trends in both income and expenses. If you are unsure about your church’s record keeping or reporting, you should seek professional assistance from a consultant and an accountant BEFORE presenting any information to a bank.
Lesson #2: DCR
Next, let’s talk about some of the key acronyms your banker will use when they talk to you. One of the most important is DCR or DSCR. This stands for debt coverage ratio or debt service coverage ratio (it’s really the same thing, said two different ways). This is the ratio that measures whether the money you have left over at the end of each year would be enough to make the loan payment.
Most banks don’t want to put you in a loan that would force you to use all your net income to make the payment. So, for example, a $1,000,000 loan has an annual payment of $76,344, and you are showing net income of $77,000 (77,000/$76,344), then your DCR would be 1:1. An ideal ratio is anything over 1.2:1. This would mean for the same debt payment, you would need to show $92,000 ($92,000/$76,344) to be able to have a 1.20 DCR.
The tricky part about getting a loan for your church the first time is you may not have been stockpiling leftover income each year prior as if you were preparing to borrow. If so, your income statement may not show that you have the funds to make a payment at all. This is actually quite common for churches and is one of the key reasons I suggest only working with a bank that understands church lending. They will know that there are funds within your expense budget that are discretionary, and, in the case of needing to make a loan payment, could be redirected to cover that cost. A good consultant or church lender will ask you about these expenses and take that into account.
Third Lesson: LTV
The 2nd ratio we will talk about is LTV. This ratio is your loan to value and will be a major factor in how much you can borrow. Depending on the type of lender you are working with, most will want your LTV to be 75% or less. Most generally, this translates into meaning you will need at least 25% of your project cost down in cash. With construction projects, this number could be higher, as many banks are hesitant to finance the “soft costs” of a project (more banker lingo). Soft costs usually include furniture, audio/visual equipment, etc. With that being said, there are also costs that can be included, or “counted” as your equity in the project. Land cost, for example, can be a great way to have up-front equity in a project and reduce the amount of cash you will have to lay out to complete your construction.
Now, You’ve Got the Basics
There are many other key ratios we could discuss, like Debt to Giving Unit or Loan Amount to Annual Tithes and Offerings. Good lenders and consultants will understand these ratios and work closely with you to determine how your ratios effect your ability to borrow. As you begin the process of choosing a financing partner, just remember that if you don’t speak “Banker,” finding a good interpreter can be the difference between a great financing package and no financing at all.