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Church Loan vs. Church Line of Credit: What’s The Difference?

Stephen Halasnik

When seeking church financing, church officials need to understand their options and decide whether a church loan or church line of credit would better serve their immediatechurch loan funding needs. Here’s what to know about both options so your organization can make an informed decision.

The Money Hunt For A Church Loan

The decision to obtain a church loan or church line of credit depends on several factors, including:

As a nonprofit organization whose sole purpose is to educate and serve the needs of its community, a church loan can come in handy for all sorts of reasons. The church’s facility may be older and need repair, which can result in astronomical expenses. The building could be in critical need of renovation, with building inspectors warning of impending danger. As natural disasters can happen all year round, is your church prepared to recover from damages from flood, fire, hurricanes, earthquakes, or tornados?

On the other hand, going through the hassle of applying for a church loan might be too much if the money needed is for minor repairs, new technology, or supplies to hold an event. Even a small church loan might not be worth the extra time it takes to gather all the documentation, apply for the loan, and then wait for approval. In this case, getting a church line of credit, offering an easy application process may make more sense.

How big the project is and how much money is needed to complete the task will significantly impact which funding route to choose. Factors such as how long you have to repay the church loan and the overall cost of the church loan after fees and interest are added must be considered. In addition, for large church loans, you’re likely to have to offer collateral or personal guarantees to get approved, putting valuable assets at risk in case of default. Make sure you use the available church loan calculators when checking church loan rates from different lenders.

More than any other factor, timeliness might be the most significant difference between getting a church loan and a church line of credit. Churches needing money in a hurry don’t have the time to apply and wait for church loan approval. Bank loans require more stringent assessments, which lengthen the lending process. Churches are typically required to offer collateral and personal guarantees and present many support documents. Depending on the lender, a church usually is asked to submit:

And even after you provide all that data, it may take a few weeks or even several months to ultimately get church loan financing.

Alternately, a church line of credit provides an ongoing source of money. Once the line of credit has been approved, it is considered a revolving line, and the money is available to the church when needed. The church always has access to the total amount of approved funds, and fees are only charged on the money that has been withdrawn. When you’re not tapping the line, the costs are zero. Borrowers draw funds when needed, pay the money back, and have the money available again for the next need. And once the line is repaid, the money is available again without reapplying.

Besides the many documents listed above, church loan underwriting also requires a review of such ratios as debt coverage ratio (DCR), loan to value ratio (LTV), and debt to income ratio (debt: income). These ratios help lenders determine whether the church has enough income to pay back the debt. The debt coverage ratio considers the church’s cash flow, the loan to value ratio looks at the loan amount in relation to the appraised real estate used as colleterial for the loan. Finally, the third ratio the lender considers—the debt to income ratio—examines long-term debt compared to total revenue. Because all these factors are reviewed, applying for a church loan is a more extensive application process than the church line of credit.

Another difference between the two funding options is the repayment terms. Be sure to find out how long you have until you must repay a church loan, if the interest rates are fixed or adjustable, and if the monthly payment installments are feasible for the church to pay.

Churches are nonprofit organizations by default and therefore were eligible to apply for Catholic church PPP loans, Baptist church loans, Episcopal church loans, etc. However, now that the Payroll Protection Program (PPP) loans are no longer available, essentially, funding choices for churches come down to church grants, church loans, and church lines of credit.

A church grant is a predetermined amount of money set aside by the government or other organizations to support churches’ projects. The church must apply for the grant, and once awarded, the grant does not need to be paid back. However, because there is a lot of competition for church grants (and a limited number of grants), it’s essential to carefully review eligibility guidelines and understand that the review process may take many months. Grants also require the church to register with the IRS as a 501(c)(3) nonprofit organization.

As discussed above, church loans are available from many small and large banks, alternative lenders, and specialized church lenders; however, the application process and wait time may prove too onerous for your organization’s needs. Luckily, faith-based organizations also have church lines of credit available.

With the Financing Solutions Line of Credit, you also have the benefits of a simpler application process, plus:

A church line of credit is a good funding resource that’s available whenever your church needs it. If you want to see if your church would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.

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