Church Debt #1

Many churches have sizable amounts of debt. Too often this debt hampers the church from paying its staff properly, maintaining its buildings adequately, or funding its programming sufficiently. Let me be clear: I despise church debt and encourage every church to do everything it can to get out of debt ASAP. Church debt is nothing more than giving money to a bank when the money should go elsewhere.


That said, I understand the reason for debt: to get some money up front to enable the church to construct facilities which will draw in people who can then provide additional receipts to pay for the staffing, buildings, programming, and debt.


I also understand that banks like to loan money, and they’ll tell a church that the debt limit is three times their annual income (much like a homeowner’s mortgage). I disagree: anything beyond two times will hamstring the church financially for years to come (much like a homeowner’s mortgage!). If your church’s debt is over 200% of your annual budget, you need to have a capital campaign to eliminate your debt as soon as possible or at least reduce it to a manageable level. Please pay attention to your debt.


All debt has three components:

  1. Time: Church debt is commercial debt in that it almost always has a five-year repayment time period. It is not like a homeowners’ mortgage which lasts 30 years but instead, church notes are a five-year note with a “balloon” at the end. The balloon means that the bank knows you won’t pay it all off during the note’s time limit of 5 years, so that means you’ll pay it all off in a balloon payment at the end of the time period OR you’ll refinance the debt (the latter is almost always the case). However, the bank bases its fee schedule on a 30-year note to keep the monthly mortgage payment low enough for the church to pay.
  2. Amount: This varies from church to church based on the need. I’ve seen churches do foolish things such as giving in to the desire to obtain a short-lived item and then putting that cost into the mortgage. For instance, some churches want a van so badly they’ll take that expense and add it to the mortgage, which means they’ll pay for that van for 30 years—about 20 years longer than the van will last. Please make sure you only finance things that will last at least the life of the mortgage.
  3. Rate: See my next post on this subject.


Church bonds: I’ve never been part of a church that floated bonds. However, I’ve seen churches use a bond issuance very successfully. This is a creative way to finance a church’s capital needs. Most of the bondholders will be the church members who will give money to the church to pay off the bonds. Occasionally someone from outside the church will buy a church bond.


It does take some money up front to work with the bankers and lawyers to get all the legal work done so ensure that you have some capital before you start down this path. Some churches encourage bondholders to gift their bonds back to the church during the course of the note. For instance, sometime people give a bond to the church at Christmas: they’ve “forgiven” the debt, so the church no longer owes principal and interest on that specific bond. Throughout the life of the bond, the church will pay out interest to the bondholders – the interest is paid from funds raised and gifted by members. Also, bonds are bought back by the church as the church has funds available.

Lead On!