Operations 104Finances, Part 2

Mike BoblitGuest Lecturer

Mike Boblit is a Ministry Development Officer with the Evangelical Christian Credit Union and has been ECCU since 2000. His current role includes consulting and pioneering financial service solutions for some of the largest churches and parachurch ministries in the country as a part of the ECCU Major Accounts Team. He worked for several Fortune 500 organizations, including Eastman Kodak Company, Kappa Consulting Group, and Sybase Inc., providing business solutions using imaging and database technology.

Class 3—Banking and Loans

Churches understand what they want out of a banking relationship—low fees and great products. Churches understand what they want out of banking loans—lots of money and low interest rates. But what is the bank’s perspective? What should the church consider in a banking relationship? There are hallmarks of good bank relationships. Churches should consider issues of lines of credit, letters of credit, short-term and long- term loans and the number of accounts for FSDA amounts. Banks have criteria for loans, such as cash reserves, financial stability, audits and independence of finance committees. This class will pull back the curtain on what the bank considers to be a great relationship and whom the bank would want to make a loan to.

Banking and Loans:A Community Model

Community Model

• Products and Services• Affinity• Service• Re-Investment in

community

Funding Your Vision:

“Vision comes first”

Loans

Understanding health:

“The single most important thingyou can do for your health is

understand your risksand what you can do about them.”

–Kaiser Permanente

When is financing not the answer?

• To bridge poor fiscal practice• To turn negative trends around• To speed up reaching your vision• When you’ve haven’t exhausted every

resource• If you have no skin in the game• When you have to cut ministry

Typical credit criteria:

• Character:If you can afford to, will you repay the debt? (good management)

• Cash:Unrestricted cash

• Capacity/Cash flow (consistent):Can you afford to repay the debt?

• Collateral:If you’re willing but unable, how will the debt be

paid?• Concentration of gifts:

Know your top givers• Conditions:

What’s the weather like outside?

Financial reporting: Accurate Adequate detail

Positive net income Liquid cash Collateral, property value Historical performance supports debt

load Loan’s impact on your ability to stay on

mission

How lendersevaluate creditworthiness:

How lendersevaluate creditworthiness:

Leadership: Meets financial obligations Plurality of decision-makers Succession plan

Internal controls andfinancial oversight

Lender’s eyes (stakeholders):

• Income• Current cash and cash equivalents• Attendance/enrollment• Staffing expense• Key ratios:

– Debt servicing ratio (DSR)– Salary expense ratio (SER)– Debt service/salary ratio (DSSR)

– Debt service coverage ratio (DSCR)

Debt Staff Ministry

Income

Ministry buckets:

Debt Staff Ministry

Income

Debt service ratio: Church

30%

Debt Staff Ministry

Income

Salary expense ratio:

30% 35% 35%

Debt service/salary ratio:

Debt Staff Ministry

Income

30% 35% 35%

<65%

Debt service ratio: School/Para-church

Tuition/Income

Debt Staff Ministry15%

Debt Staff Ministry

Income

Salary expense ratio:

15% 65% 20%

Debt Service/Salary Ratio:

Debt Staff Ministry

Income

15% 65% 20%

<80%

Debt service coverage ratio:

Net incomeInterest expense

+ Depreciation/amortization

Available for debt/Annual debt payments

= >120% - 125%

Loan Amount $1,300,000Rate 5.50%Estimated Payment $7,983

Anticipated Debt Coverage Ratio CalculationTotal Income $1,562,116Total Expenses $1,550,247Net Income $11,869

Interest Expense $74,944Depreciation & Amortization $55,623Other $0Available for Debt Service $142,436Annual Debt Service $95,796Anticipated Debt Coverage Ratio 149%Cash Flow Gap/Excess $46,640

Add Backs

Projected Loan

Example Scenario

Costs of financing:

• Origination point (0.5% - 1% +)• Appraisal/title• Interest:

– $1MM at 5.5% = $870,000 over 25 years• Banking requirements• Compensating balances:

– Banking transition• Reporting requirement:

– Financials• Control over decisions:

– Covenants

Cash reserves today:

Suggested practical steps today:

• Build liquidity• Read/update bylaws (focusing on leadership)• Monitor variances in budget:

– Push down accountability to ministry leaders• Staff expense control• Open up communication:

– Financial reports (push/pull)– Frequency (how much?)

• Establish ministry measurements (benchmarks/dashboard): – Meaningful – Measurable – Manageable– Mmmmm… actionable

Q & ASend Questions via Chat to Tami