How much debt is too much? OR NOT ENOUGH?
The vexing challenge of organizational debt vs. personal debt
Forgive the delay - out visiting with clients this week. Just rolled back to home base.
Reader questions and the questions from the Wednesday Happy Hour call create opportunities to learn, research and share insight. [and if you have a question – send it in]
Recently a client church asked a question about their debt load in light of their spending plans.
The question was driven from genuine concerns during the worst of the downturn in giving of 2020 – which was summer slump+Covid driven.
Most individuals, including me, try to pay off all debt as quickly as possible. That is a wise practice. It allows one greater freedom and flexibility.
But congregations, like other corporate bodies, are different.
There can be a wise, strategic use of debt, especially secured debt, for use in our ministries. As wise and practical as it might be for a church to be debt free, that is not necessarily one of the marks of a healthy, thriving church.
But how much debt is too much?
I decided to turn to the smartest person I know on the subject.
Jim Sheppard is one of the principals of Generis, the firm I serve.
Before joining Generis 27 years ago, he was in a key financial role with a public company in the financial services industry for some years. In that role he had to clearly understand financial structures and how they serve company growth and risk.
Over the last three decades he has seen thousands of churches and their financial structures and arrangements.
In addition to helping them craft and implement plans for capital campaigns, one funds and generosity coaching to great success, he has thought long and hard about more fundamental financial underpinnings of churches.
When I raised the issue with Jim, he drew an early version of this chart:
On the left is the total income multiple of the debt the church holds.
The x axis – horizontal line illustrates the risk level associated with that multiple of debt.
The right side summarizes the three zones – green, yellow and red.
Here’s a summary of my conversation with Jim:
Jim: At today’s rates, especially if we are talking about debt held against facilities and facilities expansions, a church can safely budget and fund debt equivalent to 1.5 times their annual income.
In other words, if total annual income from all sources is 1 million, debt of 1.5 million is reasonable.
Dave: Are you encouraging churches to take on debt then if they have no debt?
Jim: If there is a significant opportunity that would lead to kingdom and church expansion, I would encourage them to consider it. First, I would want to raise as much of the money as possible through congregational generosity. Then, if there is a greater need, debt financing can be a reasonable solution.
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My consulting is customized but is focused on key areas such as:
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Main Story continued….
Dave: The Yellow zone is where you have to balance risk and reward carefully.
Jim: The risk is elevated. Often there are tradeoffs at that place between people/staff expansion and the servicing of the debt. Those are tough tradeoffs to make. We need to take a serious look at how much of our income is devoted to staff AND building issues. With staff allocations generally running between 44 and 54%, there is a limit to how much debt service a church can absorb without impacting ministry investment.
For some churches that have seen income drops in the past year due to other factors, they have slipped into the yellow zone. There are some generosity strategies that can help push the risk level down and get it back to the green zone.
I have seen many churches navigate these yellow zones well though, not only in this season, but over time.
Dave: The final zone is high risk though right?
Jim: What we usually see in that zone is too little investment in ministries other than servicing the debt. That not only puts a church in a challenging financial position, but also tends to lower morale and momentum.
Dave: Is this a good time to refinance debt?
Jim: That depends on multiple factors that are more challenging in a general sense. If your giving is strong, you have some margin and the interest rates are advantageous to you, then yes.
Otherwise, I would need to know more.
Dave: We have talked about a new service YourChurchCFO that our Effective Ministry Team and Generis is going to offer as a virtual staff member role. Can you describe that?
Jim: Because of my background and history here at Generis, I have developed multiple tools like the one above that can help a church get its financial footing and structure built correctly for this next season. Many churches have good administrators and some even have Chief Financial Officers, but few have seen as many places, faces and situations as I have.
We think three to six months of me sitting with the financial teams and executive teams to recraft a solid plan for the next few years could be a real strategic boost for many congregations. This includes a look at budgeting practices, allocations……
It’s a virtual process where I will meet with the key leaders for three, six or twelve months to not only teach the concepts, but apply them to their situation and help get their key stakeholders on board.
It is not any of our generosity coaching or campaign development. This service focuses on aligning financial infrastructure to vision and mission so the church is not hindered by financial limitation.
End interview
I mentioned at the top the Wednesday HAPPY HOUR Senior Pastor of Large Churches weekly call. If you want to apply for an invitation, reach out to Linda.Stanley@generis.com.