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What Every Church Needs To Hear Before Taking On Debt

by Nathan Artt, on February 2020

Debt is so commonplace it barely raises an eyebrow. Household debt recently topped $14 trillion for the first time. In 2012, bank foreclosures and defaults on loans for churches were at an all-time high. With a small percentage of average church attendees being active givers, how do you make decisions about whether or not to go into debt? Carrying debt can impair your ability to run a ministry. However, so can inadequate facilities. 

Many churches face the decision of whether or not to take on debt when they outgrow their buildings or require renovations. At Ministry Solutions, our team has helped countless churches grow in wise, scalable ways. Whether you are a megachurch bursting at the seams or have an old building in desperate need of repair, this is what you need to hear before you take on church debt.

How Much Debt Do Churches Have?

Debt can be carried by giant, growing churches and small, struggling churches. Whether you can’t fundraise fast enough or find your giving population dwindling, debt is a real issue that faces a large number of churches in the U.S. 

Out of all the categories of churches impacted by debt, megachurches who have more than 1,000 regular attendees carry the largest number of debt.

Whether you approach the question from a theological or practical vantage point, many people have asked, in the church: “Is debt good or bad?”

This may not be the right question. Money itself is presented in scripture as a source of temptation and stumbling. That addresses a condition of the heart. Debt itself is related to your financial strategy. 

“Money, whether it’s in the form of generosity or debt, acts either as a great servant or a terrible master.”

Should Churches Carry Debt?

In the business world, debt is not a bad thing (with the exclusion of consumer debt). Large companies leverage debt as a means of productive growth. Commercial real estate developers make billions of dollars with capital that moves in and out of debt. So, is there a way that churches, too, can use debt in a strategic way? Historically, churches are the only vertical of real estate where buildings are not evaluated on the basis of whether or not they pay for themselves.

In commercial real estate, developers or owners will use debt to build spaces that are paid for by tenants or occupants. This isn’t the model that churches can use. There is a related model, however, that may be helpful.

Finding a Model That Churches Can Use

Let’s look at an example of a building model that churches could use. American Widgets Company (AWC) is owned by John Smith. This is a widget manufacturing company that sells to large retailers. The company manufactures 1,000 a month. AWC sells so effectively that they have an order for 500 more widgets a month for the next 10 years. John has a unique opportunity. Without cash, he can’t fund the additional infrastructure needed to produce 500 more widgets. He can either:

  • Tell the purchaser that they can’t increase business by 50% a month
  • Borrow money to fund the equipment and personnel needed to make 500 more widgets

In this scenario, John would weigh the cost of the debt against the potential income. Increasing capacity will pay for the debt. He would be wise to say yes to growth.

You can envision the parallel between this company and churches. The question for churches may not be whether to take on debt but how can debt be taken on in an intelligent way. There are insights to be gained from the illustration of AWC:

  1. Debt is not a strategy; it is the result of a strategy
  2. Debt should only be taken on when it’s clear how it pays for itself
  3. Debt pays for itself only when there is a need to create capacity

Intelligent Debt and Building Plans

Considering these three tenets of leveraging debt in a smart way, how should you proceed with funding large-scale projects, like new buildings? Church projects are inherently about creating ministry capacity. More than real estate or any other logistical considerations, increased ministry capacity should fund itself.

For example, Atlanta Church is currently hosting four services in a 700-seat venue. Each seat represents $1,500 in annual giving. An architect designs a space program for an additional 500 seats, family ministry space and additional parking. This amounts to $10 million dollars in cost for the hard costs, soft costs and site work.

Simple calculations show that this project will cost $10,000 per seat for a church whose seats create $1,500 in income (6X cost to revenue). Assuming the church can come up with enough capital to bring the loan amount to $7M, the debt service (principal and interest) on the building would be close to $500,000 per year, against a potential/future income of an additional $750,000 per year. This means that 2/3 of the capacity that is created goes to make the minimum payments on the loan, leaving only $250,000 of the additional income to pay down the debt, hire personnel and fund additional ministry. It’s simply not enough! The pastor should make one of two decisions—either scale down the design/scope of the building, or double the amount of capacity for the same dollar.

Does Your Church Need a Financial Consultant?

Our goal at Ministry Solutions is to help you say yes to growth by eliminating the guesswork, accelerating vision and protecting the purpose of your church. If you are planning an upcoming church building project, are unsure about taking on debt, or navigating the complexities of church growth and would like a second opinion, you might find value in a conversation with a member of our team.

Topics:Financial StrategyFacility StrategyChurch DebtLeadership