By Jerry Vaughan | President, WatersEdge Ministry Services
Scripture warns Christians about the potential hazards of debt. During the course of my nearly 40 years of lending experience (in both secular banking as well as ministry-based financial services), I’ve seen God use loans to successfully provide the physical space that growing congregations need. But I’ve also seen churches make costly mistakes. When it comes to debt, regardless of the size of your church or the size of the loan, here are my top six recommendations to ensure your church borrows wisely.
- Smart loans require planning. It seems obvious, but your church needs to be in agreement on the arrangements of what to build, how to build it, and how much to borrow. Many churches come to me, delighted to see growth in their congregation, and say something like, “We want a loan to build a new educational space.” But they haven’t taken the time to consider any of the details. A thorough plan must exist to bring that vision to reality, not to mention accurately calculating the required financing. First, determine the need. Consult with an architect who will come up with a design that best meets your church’s requirements. Next, determine the cost. Get multiple bids from a variety of builders, and don’t feel pressured to use a particular builder just because the owner is a church member. Finally, secure sources of funding. I typically recommend a combination of capital fundraising and borrowing.
- Count the cost. How much can you borrow? Luke 14:28-30 speaks of a man that doesn’t calculate the cost of building. He lays a foundation but isn’t able to finish the project. The same truth applies to churches — don’t build more than you can afford, and don’t cut corners. While hiring an architect seems like a large, upfront cost, I strongly recommend this step because the architect’s expertise typically saves money in the long run, not to mention guaranteeing a better build. At WatersEdge, we use a ratio of debt-to-income to ensure churches aren’t borrowing more than they can afford. Specifically, we consider a loan equal to 25 percent of annual budget receipts to be the maximum level of debt a church should take on. This conservative approach means we sometimes have to say no to churches who need a loan but simply aren’t in a wise position to borrow. But that biblically guided caution also means we’ve never experienced a single default in the more than 50 years since we began our church lending service. It’s just one of reasons The Baptist Foundation of Indiana has chosen to partner with WatersEdge to provide loans to Indiana Baptist churches.
- Is your vision bigger than your budget? Find ways to “engineer out costs” without cutting corners. If you know what you want to build but the price tag is more than anticipated, there are techniques you can use to strategically reduce costs. Examples include choosing more economical interior doors, opting for vinyl over wooden baseboards, energy efficient light fixtures, stained concrete instead of tile, or a metal building without a brick facade. Never risk structural integrity to cut costs; instead, choose more affordable options that don’t impact the space or functionality or the building. Fixtures can always be upgraded in the future, while additional square footage is considerably more expensive to add.
- Trying to build debt-free? Make sure you can raise funds quickly. Inflation and other factors tend to drive up the price of building and material costs between 10 and 15 percent each year. Your church may start with a $1 million project, but if you take 4 years to raise the money, the build may now cost $1.5 million. It seems counterintuitive, but using a loan to help fund your build may actually save your church money long-term.
Building debt-free also has a tendency to take much longer than borrowing, and this delay can be difficult for churches experiencing growth. One church I worked with raised money and pieced together a building over the course of ten years. They succeeded in their goal to complete the build without debt, but failed in their overall objective, which was to reach young people with the Gospel. I’ll never forget what the pastor told me: “What bothers me most is that we lost three generations of youth who we never were able to reach because we didn’t have the space. If I had known it was going to take this long, we would’ve borrowed the money a long time ago.”
- Make sure refinancing is worth the hassle. Your church should only consider refinancing if you can simultaneously lower your interest rate and your monthly payment. Also, don’t assume banks are your only option for refinancing. Ministry-based lenders like WatersEdge have competitive rates, and unlike secular banks, nearly all of the loan interest we collect is returned to Southern Baptist churches, organizations and like-minded ministries. Last year alone WatersEdge gave back $4 million in loan interest, and more than $39 million during the past decade. Another reason to consider moving your church’s loan away from a bank is because a ministry-based lender like WatersEdge will uniquely understand the potential pitfalls of church finances, and can better help your congregation navigate challenging circumstances should a crisis arise.
- Take the burden of debt seriously. I’ve seen debt destroy churches. The most dangerous mindset is that borrowing is “not a big deal,” because the truth is that the commitment to pay back your congregation’s debt doesn’t go away. Taking out a church loan for a new build is like the excitement of buying a new car. When you drive it off the lot, you aren’t worried about the payments or how long you’ll be paying them. But fast-forward six months and the new car feeling has likely worn off. Suddenly, the reality of making those monthly payments sinks-in and seems like much less of a joy.
The good news is that most congregations don’t like debt, so they make it a priority to retire debt quickly through capital fundraising campaigns, one-day fundraising pushes, or by devoting extra offering funds to additional principal payments. Many of our clients take out loans with a 20-year terms, but the vast majority pay these notes back within 5-7 years. WatersEdge doesn’t penalize early repayment (unlike many banks). In fact, early repayment is a practice we encourage churches to actively pursue! This is just one of the things that makes a WatersEdge loan different.
I thank God for the opportunity I have to serve churches in such a unique way, and for the partnership between The Baptist Foundation of Indiana and WatersEdge Ministry Services. My prayer is that every church considering a loan will seek the Lord’s will and pray for biblical wisdom as they respond to the needs of their congregation.
Jerry Vaughan is president of WatersEdge Ministry Services, a part of The Baptist Foundation of Oklahoma.