Church Financing- Loans or Bonds?
Construction of any new church usually has one question in common with every other new church built: Loans or Bonds?
This one financial decision can mean the loss or savings of tens of thousands of church dollars.
What are the major differences?
Traditional Loans:
1. You borrow money from one lender.
2. Underwriting rules are usually stricter than for bonds.
2. Interest rates are usually higher than for bonds.
Bonds:
1. You borrow money from multiple lenders (bondholders.)
2. Underwriting rules are usually less strict.
3. Interest rates are usually lower than conventional loans.
4. Church can usually borrow more than with traditional loans.
So, lower interest rates means bonds win right?
Not so fast.
Even though traditional loans might have higher interest rates, bonds normally cost more to close, 10 to 13 percent versus 1 for traditional loans.
If the cost of the bond is amortized over 20 years, this higher upfront cost can mean an actual interest rate of 1/2 or more percent higher than the stated interest rate.
If the bond interest rate is 1.5 percent or more lower than the traditional loan rate it is probably as good a deal or a little better than a traditional loan.
There is one big stumbling block for bonds that needs to be taken into account.
If your church plans on paying the bonds early, the costs of the loan are amortized over a shorter period of time, thus making the effective interest much higher. One must also make sure there is no pre-payment penalty in the bond terms.
Bonds are probably a better choice if they are 1.5 percent or more lower in stated interest rate and the church does not plan to aggressively pay the bonds early.
Private bond offerings, which are bonds sold privately within the congregation, usually have lower up-front costs. If you have members with significant capital this may be a way for them to finance your construction and receive a competitive rate at the same time.
So what is a church to do? Evaluate all options with an accountant, preferably a faith based accountant that has experience with church financing and is familiar with traditional loans and bonds.
