To Borrow… or Not to Borrow?!

The following questions often surface in our work with congregations and non-profits….

Should we, or should we not, borrow to help fund a proposed building project?

  • If we borrow, how can we afford to make the additional loan payments?
  • If we borrow, won’t we be strapped with debt payments for a long, long time?

Those who are “loan adverse” are sometimes heard suggesting that borrowing should be avoided at all costs, and that it is more prudent to only build what you have the cash to do.

After having had a front row seat to many significant building projects, I can share the following observations:

  1. Planning teams realize that longer-term debt is an important funding component towards accomplishing the project that is needed. By “longer-term debt”, I refer to the debt that you still have after the building project has been completed.  This longer-term debt is typically incurred to pay off the earlier interest-only construction loan.
  2. Planning teams realize it is unwise to reduce the scope of the project simply to avoid long-term debt. They realize that doing so would introduce significant risk of “under-building”, only to find out in a few years that the completed project is undersized, and no longer meets the expanding needs of the organization.
  3. Planning Teams realize that longer-term debt does not need to be feared, as long as you have a sound debt retirement strategy. What does that strategy look like?  Here are two key insights…
  • Do not pay the monthly debt P&I (principal & interest) out of your operating budget. This is worth repeating… do not expect your regular annual offerings to cover the loan payments.   The minute you roll the debt into your operating budget, everyone forgets about it!  The debt will become comfortable hiding out in your budget, and over time, will slowly choke your ministries.
  • Do pay the monthly debt P&I from successive debt reduction campaigns. Don’t miss a beat!  The end of your first building campaign should immediately lead into your debt reduction campaign.  Don’t worry, your congregation will not burn out.  In fact, after having conducted hundreds of debt campaigns, we have discovered that churches that conduct a debt campaign, on average raise 75% – 80% of what they raised in their original campaign.  If needed, congregations will do two or even three debt reduction campaigns to get to the finish line and burn the mortgage.  Just imagine how much money is saved in interest expense!

I once heard it said that a congregation without debt is not growing.   As much as I advocate for debt being part of your “funding toolkit”, I do not agree with the notion that a debt-free church is not growing.   Rather, I feel a church with a Vision that translates into ten-year Master Plan is more likely to be a church that is growing and thriving.   To the extent that sound debt employment and debt management can help spur progress towards your vision, Hallelujah!

Fred Stoltz
Sr. Program Director
The James Company