Numbers a lender looks at when considering a church loan – other factors

This series of posts discussing ratios used by lenders when considering whether to make a loan to a local church starts here,

A few additional comments on stress test and cash on hand –

Stress test

One of the lenders I spoke to said they are performing a “stress test” on the debt coverage ratio with an interest rate of 7.5%.  This shows how difficult it will be for the church to handle an increase in the interest rate, if rates were to rise in the future.  This will probably make it more difficult for churches to qualify.

Let me recalculate Example Community Church’s debt coverage ratio going from 5% to 7.5%:

Here is information for repricing the loan to 7.5% for the stress test:

  • 7.5% – interest rate on loan
  • 20 years – term of loan
  • 32,224 – monthly payment  
  • 386,688 – annual payments

Debt coverage ratio

  • 300,000 – available to cover debt payments as calculated in previous post 
  • Divided by:
  • 386,688 – loan payments with repricing at 7.5%
  • 0.776 – debt coverage ratio, or DCR

The debt coverage ratio drops from 0.947 to 0.776, which is a big change.  Even if the church qualified under the initial calculation by being substantially above a 1.0 cut off, the stress test of 7.5% would drop it down a long ways.

I do not know how the particular lender incorporates the stress test into their evaluation.  But here you have a picture of what that looks like.

Cash on hand

Another lender mentioned that they have added an additional calculation.  This is the amount of cash on hand.  They want to see either cash equal to three months of salary plus debt payments or cash equal to 20% of total expenses.  Ouch. 

Let’s see what this would look like using the made up financial statements of Example Community Church that you have seen here.

Cash equal to three months salary and debt:

  • 500,000 – annual salary  
  • 316,776 – annual P&I (total payments from previous post)  
  • 816,776 – total for year  
  • 245,032 – 3 months worth of salary and debt  
  • 200,000 – cash from above  
  •  (45,032) – shortfall  

Cash equal to 20% of total expenses

  • 1,550,000 – total expense  
  •    310,000 – 20% of total expenses  
  •    200,000 – cash
  •  (110,000) – shortfall  

Again, ouch.  I would make a very wild guess that there are not many churches that would have enough cash to meet either of those calculations.  Why? Running down cash balances would likely be the very first thing to do when giving drops.  Would you rather use up your cash reserves or lay off staff?

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