Numbers a lender looks at when considering a church loan – debt coverage ratio

This is the most technically complex ratio we will discuss.  This is one of three calculations that lenders typically use when considering whether to make a loan to a local church.  Previous discussions started here, and continued here and here.

The concept of this ratio is to look at how much income the church had last year to apply towards the loan payments.  This would take the change in net assets (okay, okay, you can call that net income if you want) then add back interest and depreciation.  This represents the income that could be applied to loan payments after all the other expenses were paid.

This number is then divided by the total P&I payments, not just the interest expense.

So you see it is an interesting arithmetic calculation.  The goal is to provide an indication how easily the church will be able to continue making loan payments.

So what does this calculation look like?  Let’s use our hypothetical Example Community Church financial statements, which you have seen before.  You can find them here.

Here is information for your assumed loan:

• 5.0% – interest rate on loan
• 20 years – term of loan
• \$26,398 – monthly payment
• \$316,776 – annual payments

I would calculate the debt coverage ratio this way:

• (50,000) – change in net assets
• 200,000 – add back interest
• 150,000 – add back depreciation
• 300,000 – available to cover debt payments
• Divided by:
• 316,776 – loan payments
• 0.947 – debt coverage ratio, or DCR

That means last year you did not have enough money before interest and depreciation to pay 100% of your P&I.  The built-in assumption is that this year will be the same.  That scenario makes lenders nervous.

By the way, each lender has their own way to calculate DCR.  I used the calculation that makes most sense to me as a CPA.

Each lender also has their own requirement for the debt coverage ratio.  Of the three lenders I spoke with at the CLA conference in April, one required 1.0, another required 1.1 or 1.15, and another required 1.25.  Check your loan document for the exact requirement.

So anyway, with the made-up financial statements you have seen, the debt coverage ratio is only 0.947 when a requirement would be 1.0 or higher.  Since that is barely below the requirement, it would be iffy whether you get the loan.  If the lender required 1.1 or 1.2 and preferred something even higher, then I would guess you will not get the loan.

This is a very interesting calculation.  I won’t go into the dynamics of the calculation, but will just say that it is very difficult to increase this ratio by a big factor if you fall short.  To have a big impact on this ratio, giving has to increase a lot without any increase in spending.  Sort of difficult for a church to do that after a few years of cutting back on expenses.