FINANCING STRETCHES THE CHURCH TECHNOLOGY BUDGET

Christianity Today, in a revealing study of church borrowing, reported that historically over 84% of churches utilize some form of debt or borrowing for construction or media technology projects and that nearly 70% of churches with annual budgets exceeding $500,000 finance AV technology. The amount of money a church borrows depends on the size of its budget.

Technologies for Worship Magazine's annual survey of church plans for media technology projects reports that a high number of churches plan to add, upgrade or install new media technology including sound reinforcement, digital display technology, integrated computer and communications systems, broadcast technologies, enhanced security and fire alarm systems and music ministry equipment. At the same time contractors and systems integrators report that churches often "under-budget and over-spend" on their AV, media technology projects. The result is that churches often settle for "less than" optimal systems. One leading church media systems contractor reports that in many cases churches repeat the process of technology integration two or three times before finally "getting it right". Technology budget failures are costly from a "financial stewardship" standpoint.

Spread the cost of media, sound or AV technology to match the timing of cash flow. Churches, large and small, struggle with the idea that equipment and technology must be paid out of the annual capital budget. In turn the typical capital budgeting process is sometimes an annual quagmire that delays or reduces a project size. One of the primary reasons that churches leverage outside capital (financing) is that it spreads costs over multiple budget periods and across the life of the equipment. Churches find financing to be a creative "business solution" to budget and cash flow needs. They value how it helps stretch the budget and helps fully fund the optimal AV project. By working with a creative lender or qualified financing source a church may discover a unique and creative way to meet budget objectives for its full media project. Sometimes the best solution is mid-term financing from 24 to 84 months. Other times the best solution is a "bridge loan" for 12 months with the ability to pay-off at any time.

Interim financing can support media technology projects that often take weeks and months to fully design, order, deliver, install, test and implement. After the original design consultation, contract administration and order process a recent $2.2M audio and video projection system in a well known California church took nearly 11 months to install and activate. The AV systems installation needed to coordinate with the construction timetable for the facility. The project included eleven months of "interest only" financing leading to a 36 month fixed-rate term financing. Not all projects take this long yet it is not uncommon for projects to unfold over several months especially where construction and facilities are involved.

Churches finance media technology as a means to match costs to the timing of tithing, contributions and donations. There are also other reasons why churches utilize financing as a financial stewardship strategy including:

1) Financing helps the church retain and preserve cash and capital
2) Financing helps preserve bank credit lines for operations, working capital and ministry growth
3) Financing acts a "hedge against inflation" in that the church pays for today's use (of the technology) with today's dollars and pays for future use with future dollars.
4) Fixed rate financing allows churches to spread costs over multiple budget periods while creating a predictable monthly payment
5) Financing helps to the church to "right-size" the project and lets the technology "pay for itself" through ministry and congregation growth

Small and medium sized churches borrow infrequently. Church leaders may not know what questions to ask of a lender or financing source. Here are a few suggestions: Determine your financial, budget and cash flow objectives then seek a financing solution that accommodates your specific goals. Ask your financing source how experienced they are with lending to church and house of worship facilities. Request recent references. Ask what criteria are used to determine credit approval and the interest rate. What about fees? Is there is a pre-payment penalty for early payoff? Obtain a commitment to a step-by-step process so that you know, in advance, what the procedure is. In most cases you should not have to submit an application fee or monies up front to get approved.

Today's church media technology projects can be complex and involve almost every key department in the church administration. As such it is critical that churches, big and small, new or well established, take a professional approach to evaluating, planning and implementing church media projects to insure that they fit the scope, objective and timetable respective to the particular ministry. At the same time its important that executives within the church who are charged with leading a major media project take the time to engage the most reputable and knowledgeable professionals available to consult, design, advise and implement a comprehensive media technology strategy. Prudent methodology extends to the analysis of budgeting, planning for and funding media technology projects to insure the best stewardship of church finances and a maximum return on media technology as a powerful tool within the ministry.

SPREAD COSTS OVER MULTIPLE BUDGET PERIODS

On the one hand the overuse of financing and the over-availability of easy credit, especially in the housing industry, is a big part of the reason for our current economic struggle. At the same time virtually every segment of our country's economy was built over the last hundred years on the the leverage of outside capital investment. It is not the use of outside investment capital or borrowing that got us into trouble but rather the sometimes lack of prudent, restrained or intelligent use of borrowing. It remains important for us, as business men and business women, to make that distinction because our economy will recover and advance and a key part of that re-growth will be the return of normalized "credit markets'. As part of that process we need to apply a "lessons learned" approach to the use of capital investment and the leverage of financing.

Most businesses today do not fund their day-to-day operations entirely with internal cash but rather they utilize a "working capital line" or operating credit line at their bank. This type of short term, usually "revolving" commercial credit facility allows the business to operate steadily during times of uneven cash flow, seasonality or intermittent earnings periods in order to pay suppliers, maintain payroll, cover operating expenses and generally bridge the timing of revenue vs. costs. The lack of availability of such financing means that many organizations cannot sustain themselves through uneven revenue periods, economic "down-cycles" or various transition periods. Many businesses, governments and non-profits operate through uneven revenue cycles and are especially vulnerable during periods of calamity such as natural disasters, a dependence on seasonal buying (Christmas) or periodic shifts in customer buying habits.

Hopefully, the current "pain" that so many businesses, city, state and county governments and virtually all other types of organizations are experiencing will provide a "lessons learned" approach that causes "financial decision makers" to build sufficient cash funds and capital reserves while balancing the use and utility of outside capital investment and borrowing as an important resource to be conserved yet leveraged intelligently.

Retain Cash & Capital In Difficult Times

For many it is a difficult time in our U.S. economy. All of the factors point to sluggish sales, a slowdown of growth, high unemployment and stagnant income levels. For many there is great uncertainty and concern about just how fragile our banking system and our economy really is. Most of the so called "experts" did not anticipate the speed nor the devastation of the real estate crisis nor have they had ready answers for this period of economic trouble. All of this doom and gloom is daunting and discouraging, yet it is imperative that we build our businesses, expand our church congregations and carry on with the business of hope, growth, faith and expansion. In this period some churches may be tempted to curtail projects, reduce budgets or put plans on hold. But, one opportunity is to leverage outside capital as a means to spread media and AV technology costs over multiple budget periods. This strategy helps in several ways. It allows the church to retain cash and capital for operations and growth. It takes advantage of low cost capital readily available for technology. And it matches the timing of costs to the timing of revenues (tithing, donations, contributions). Think about optimal solutions and consider cost allocation as a means to continue projects and continue to build on a future once seen and still preserved.

MEDIA SYSTEMS INTEGRATION FINANCING

Many of today's media technology projects integrate a wide array of different technologies including presentation, projection & display, sound reinforcement, lighting, HD cameras and HD screens, computers and servers, communications systems (such as wireless microphone systems), conference room equipment, mixing consoles and automated or manual control systems, security systems, digital display networks, plus all other costs such as software, mounting brackets, wiring, shipping, installation, training, warranty and services. Virtually all costs including labor may be included in the financing however most equipment finance lenders exclude real property such as land or permanent buildings from such financing.

Media Systems Integration Financing offers the bundling of most project costs into a single monthly payment to simplify budgeting, and planning. At the same time Media Systems Integration Financing spreads project costs to match the timing of revenues and cash flow. This spreading of costs and delaying of costs to future payment periods acts as a "hedge against inflation" because it allows for payment of current costs (payments) with current dollars and future payments with future revenues.

Media systems integration projects can be found in churches, stadiums and arenas, corporate conference rooms and training facilities, broadcast studios, and live staging, event and concert venues. Increasingly media systems integration are installed with retailers, shopping malls, restaurants and nightclubs.

In many cases interim financing or "interest only" is provided during the build-installation phase followed by fixed-rate, firm-term financing for 12 to 84 months. Generally financing is provided at competitive rates but without common bank encumbrances such as "blanket liens", restrictive covenants, or annual fees.

Bridge Loans & Short Term Financing As a Budget Solution

For many churches, religious broadcasters and worship technology firms the cost of new media technology such as sound reinforcement, digital display technology, projection systems, lighting, and HD television broadcasting systems can be a "budget busting" purchase. For many mid term financing from 12 to 84 months is a solution that spreads the cost of technology to match the timing of revenues, tithing, contributions or donations. However when an organization needs the technology today and knows it can fund the cost from a future budget (for instance 8 months from now)....the idea of short term financing may allow the immediate acquisition of the technology while forestalling payment to the future budget funding date. Media technology manufacturers and resellers can work with specialized financing (such as National City Media Finance) to create short term financing (one to 12 months) that allows "bridge financing" where the customer may make nominal payments, interest only payments or sometimes no payments' until the budget funding date. This allows immediate acquisition and use of the technology while suspending payment until the future budget date. For instance I currently work with several manufacturers their dealers and resellers to provide this type of financing, sometimes even with 0% financing options for 12 or 24 months. This allows the customer a special financing that is usually approved by the board, executive committee or congregation. For more information on bridge financing please contact me directly at russ.munson@nc-4.com.

Don't Underbudget & Overspend on Church Media Technolgy Projects

I recently held "Financing Alternatives For Church Media Technology" workshops at the National Association of Broadcasters convention and at the National Systems Contractor Association (at Infocomm) both in Las Vegas. During these one hour workshops we discussed how churches can "stretch the budget" for broadcast, AV and media technology projects using specialized financing geared specifically for Church, House of Worship, and Media Ministry projects. One important element that we discuss is something that I have repeatedly been told by contractors and systems integrators who work with churches on broadcast and media projects. That is that many churches have a tendency to want to "scale back" technology projects to "fit" the current annual budget, but that in doing so they often "cut to the bone" in ways that results in future over spending or the need to replace technology sooner than necessary. Specialized financing for churches is a tool to help churches stretch budgets and "right size" projects. In many cases it is not simply the availability of capital.....but the creative use of capital that makes the financing add value to the budget process. The goal of doing the project "right" the first time, can save tens of thousands and sometimes hundreds of thousands of dollars in a modern media technology project.

Media Technology In Church & Ministry

Churches are leaders and early adapters of all types of media technology. With over 400,000 churches in the U.S. and with purpose and dedication of Christian evangelism churches have adopted and adapted media technology as a means to help reach the congregation and grow the ministry. Sound, audio-video, HD television broadcast, digital display, wireless, video projection, all are technologies being implemented and harnessed at today's churches across virtually every denomination. Sound and Communication magazine completed its 11th annual Worship Center Survey in which church respondents indicated that over 94% of churches will install or upgrade media technology within the next 18 months. In 2006 alone almost $8 Billion was spent on sound technology in U.S. churches.

Many contractors and systems integrators who specialize in church media projects report that although most churches recognize the value of media technology to the growth and evangelism of the ministry and desire to complete media technology projects that many churches "under-budget and over-spend" in the area of equipment, technology and systems. At first this sounds contradictory yet when you consider that many churches fail to adequately budget for the "right size" media technology project, then end up "piece mealing" or patching together various systems (often not compatible) over several months or years one recognizes the risk and probability of repeating costs multiple times that result in poor stewardship of finances.

Partial financing is a means to help churches "stretch" budgets and "right size" media technology projects. In a recent church project the media equipment costs were $450,000. The church's budget $250,000. The vendor and financing source worked together to offer 0% financing for 24 months on the remaining $200,000 so that the church would not undermine its media systems objectives. The monthly payment was $8,333 which equaled a weekly portion of $2083 each week. The church has 2,000 in its congregation which equates to approximately $1.00 per week per each member.

In summary media technology helps define and communicate a clear purpose in today's House of Worship. It is a means to share The WORD, to reach the congregation and expand the ministry. The right budgeting for the right-size project is essential to helping ministers and their congregations come alive with the passion of belief achieved through a complete media ministry. Media technology is an important tool to help pastors and church leaders guide their congregation to deeper faith and commitment.

CASH IS KING

Cash is King! Cash is even more regal in difficult times. In our current economy broadcasters and media technology users may feel it more prudent to hang on to cash (and capital). They are more cautious about investing in needed equipment and technology. Subsequently they delay or drag out equipment purchasing decisions, hoping to stall until revenues and cash flow get better. There is "pain" associated with parting with cash or capital.

During this period, when financing costs are at historic lows, NOW is a great time to introduce financing alternatives, as a business solution, that spreads the cost of technology to match the timing of revenues and cash flow (current and future). Spreading the cost of equipment and technology is less "painful" because it allows retention of cash and helps preserve capital and equity. In effect shifting the budgeting from the Capital Budget to the Operating Budget facilitates both capital retention and investment in new and needed technology.

Remember that while Cash is King low-cost financing is a means to retain cash and yet make the investment in broadcast equipment and media technology that, in turn, helps cash grow.

Financing for Faith Based Broadcasters

With the National Religious Broadcasters convention and trade show in Nashville March 8th to 11th I thought it would be timely to discuss technology financing alternatives for this segment of the broadcasting community. Religious broadcasters often combine traditional advertising revenue, especially local ad revenue, with a mix of contributions and donations from members of their respective worshiper communities. Larger broadcasters may cull support from national and even international members, worshipers and contributors. The technology transition to digital and HD as well as the need to upgrade to modern billing systems, station automation, camera systems and HD radio broadcast for both TV and Radio broadcasters may create the need for financing that supports or aligns with a specific broadcaster's revenue generation method. For instance religious broadcasters with a steady donor base may find that short term, low-cost, financing which allows for prepayment at any time is most cost effective. Other broadcasters find that the ability to spread the cost of technology over months or even years......aligns with their revenue, donor and contributor timeline. As a "non-profit" religious broadcasters often must balance the need for financial stability against the mission to fully fund programing. Again, financing, properly utilized may be an effective tool to help manage technology costs and growth initiatives.

Debt vs. Equity

The saying goes that "debt is almost always cheaper than equity". Equity is the ownership by yourself or others in your Broadcast enterprise. In most cases Equity is traded for investment. However equity is expensive IF your broadcast enterprise is growing in value or expected to do so.

Debt is an investment in the enterprise usually without giving up equity. On the surface Debt may seem more expensive than equity yet it is rarely so. The investment of cash or capital in broadcast equipment is a use of equity since it dillutes equity. In cases where cash is used, vs. debt, the cost of financing (using ones own cash) represents a loss of investment return (ROI) that the organization would have received on its own capital. Financial managers must ask themselves: "If my enterprise can attain a 10% return on its capital, and obtain financing at 6%,why not leverage debt in acquiring depreciating assets and retain our own capital for investments that appreciate such as organizational growth, projects, acquisitions, people, advertising, etc.

INTEREST RATES & FACTORS EFFECTING YOUR BORROWING RATE

Today's announcement by the "FED" of a decrease by 75 "basis points" in the "Fed Funds" rate got me to thinking of how confusing the whole interest rate discussion is, and if it's confusing for those of us in finance & lending it surely must be somewhat confusing to the occasional broadcast or media equipment finance borrower. I thought I would devote this article to some of the myths and misconceptions about interest rates. In addition I have added a short list of some of the factors that effect the borrower's ultimate borrowing rate.

COMMON AND MISLEADING INTEREST RATES HYPES
I would like to begin with three uses of rates that are widely (and wildly) circulated. These three market segments often create misconceptions because they are born out of the marketing hype of promotional advertising. These include: 1) Consumer automobile financing & leasing, 2) mortgage loans, and 3) Credit card promotions. As consumers it seems we are bombarded with promotional advertising from Car manufacturers and dealers, mortgage lenders and brokers and credit card lenders. We are often "teased" (to the point of almost believing) introductory credit card promotions, Zero Percent or 1.9% automotive financing and mortgage loan financing that offers a significantly lower monthly payment than our drab 30 year fixed loan that we refinanced just two years ago. As consumers we may "buy into" these interest rate promotions to the point that we begin to think that the "low rate financing" for a car, or the 5.5% ARM for a mortgage or the 0% 6 month introductory "balance transfer rate" on a credit card is the actual rate that everyone is paying and we deserve it too. Then, we ask ourselves why, if the Prime Rate (the rate banks lend to their best customers) is 6.5%, would we not qualify for a better business loan rate if we can get a mortgage at 5.5%, or a credit card at 6%, or a car loan at 1.9%? The answer, of course, is that if something appears to be too good to be true, it probably is! The truth is often found (with a magnifying glass) in the small print on the back of the credit card application, the auto lease or the 30 pages of mortgage loan documents. In each of the three consumer loan categories above the lenders, brokers, lessors all make their target yields (and more) through the use of a wide array of interest rate enhancements that make up for any apparent "good deal" that you are getting.

In the car business manufacturers and dealers subsidize the rates. It is ridiculous to believe that a car dealer is offering true 0% financing when capital is costing GMAC, Ford Motor Credit, Toyota Credit or the local credit union 3%, 4% or 5% plus an equal amount to cover their costs of operating credit centers, lending officers, cost of credit processing, and delinquencies and losses plus achieve a profit margin. In truth the 0% financing is funded within the profit margin of the car, truck, boat, furniture or whatever. The test of this, of course, is to ask the car dealer for a reduction in the sticker price while retaining the 0% financing offer. Depending on the margin that the dealer holds in the automobile there will generally be "Zero" negotiating. It's either a cash or finance deal, you choose. If you pay cash the dealer may choose to "give up" some of the amount of margin that is being used to subsidize the financing. For instance where the dealer is offering 48 month financing at 0% on a $30,000 car the monthly payment is $625. Let's say that today the auto finance company, funding the dealer, needs to achieve a 7.5% yield to cover the cost of capital plus cost of finance administration, credit risk, etc. So by computing the "zero interest payment", of $625, for 48 months at 7.25% we can calculate that the bank would actually pay the dealer, a discounted price of $26,131, for the car. That means that the dealer has $3,869 of margin allocated to finance costs (the amount that is used to subsidize the rate from 7.25% to 0% for 48 months. Caution, in most cases, if you try to negotiate the price (down from $30,000) the dealer will offer some amount less than the full margin of $3,869. The reason is that auto dealer generates higher margins on finance deals, especially leasing, than on cash purchases.

In the arena of mortgage lending take a look at your "Final Closing Statement". Factor in the 30 itemized costs associated your loan, including "points paid" when you add those costs to your loan you will find that 5.5% quickly becomes some higher number. In addition, various types of loans can be effectively expensive if your payment is subject to changes and increase as interest rates change.

The most obvious myth and misconception is probably in the area of frothy Credit Card promotions. While not quite "bait and switch" the marketing could compete with "seven minute Abs". On the front of the mailed promotion, in large and brightly colored letters, they talk about the "low introductory rate", a special deal for you that allows you to pay off other loans and credit cards and have no interest for 3 months or 3.9% for 6 months. However turn the offer over, look at the small print. It says the $50,000 credit line may actually be $1,000 and the interest rate will soon be 18% or 22% or 29%. Add to that you will find that any time you miss a payment there is a $39 fee or a similar "over the limit" charge. Recently it was reported by one credit card company that late charges and over limit fees comprised over 35% of their revenues!

A REALITY CHECK FOR INTEREST RATES IN BUSINESS LOANS AND LEASES
All of this brings me to the discussion about today's interest rate reduction, the announcement by the FED, the reduction by most major banks of their Prime Rate to 6.5%, and the resulting expectation by the business community for lower borrowing costs. Certainly competition and market depand will encourage lenders to adjust rates to qualified customers, however I think it is important to note that the Prime Rate is generally considered a benchmark for lending. Most banks and lenders use several types of lending indices including LIBOR (The London Interbank Borrowing Rate), Matched Term Treasuries, SWAP Rates, Bond Rates, etc. And while some banks base their commercial loan and leasing rates on Prime (plus some number, Prime + 1%, 2%, 3% etc) the rate that any given commercial or business customer qualifies for, at any given time is dependent on many factors.

FACTORS EFFECTING BORROWING COSTS:
My list of factors, affecting a customer's borrowing rate, is not all inclusive, but includes: The quality of relationship and trust between the lender and the borrower, the Cost of capital to the lender, the amount to be borrowed, the type of loan, lease or other instrument, the term of the loan or lease, the equipment or asset being financed, the utility and future marketability of the collateral, the degree of col lateralization (how well secured is the lender) the frequency of payments (monthly, quarterly, annually, seasonally) the application or absence of personal guarantees, the time in business of the enterprise, the financials and tax returns of the enterprise, the tangible net worth proportionate to the amount borrowed and the historic and expected cash flow proportionate to the amount borrowed, the inclusion of fees, the availability of blanket liens (on current and future assets), amount and nature of liquidity accounts resting with the lending institution, compensating balances (both as an offset to risk and as a source of revenue to the institution), control via restrictive loan covenants (which may include the requirements for audited financials, certain financial performance factors, management permanency, etc), investment by the borrower in down payments, prepayments, or capital reductions of the amount to finance, whether the loan or lease is structured as a fixed rate or floating rate transaction, the timing of funding vs. the timing of payments (early funding with later payments is more expensive than early payments with later funding). As I said this list is not all-inclusive but gives some idea of the types of factors that may effect borrowing costs, risk assessment, measuring of credit costs, loan amortization, billing-collecting costs, loan administration, etc.

SUMMARY:
From my perspective the bottom line for any client is to gain an understanding of your particular situation and how you and your business might be viewed by your lender or other sources of capital. Develop a relationship with lenders so that they can fully understand your business and can gain trust in you, your management team and your business. Consider your objectives against the lenders own. Seek to work with your lender to negotiate a fair but realistic transaction and relationship based borrowing line. Consider your lender as an investment partner in your business. Build and sustain a financial package and portfolio that explains your company, the market, your competitors, and addresses the potholes, dips and peaks, changes and events effecting your business. Don't ever ever ever mislead or try to "bluff" your lender. In most cases you will lose the very trust you want to engender for your business and yourself. Lastly, remember that interest rates reflect the cost of your use of outside capital as an investment tool to acquire assets to enhance value and build revenue. In most cases the lender's return on capital is somewhere around 1% to 3% which is a relatively small margin compared to just about anything else you might acquire including the equipment, technology and systems being financed.

Equipment Loans vs. Equipment Leasing

Many types of equipment loans and leases are very similar. Yet there appears to be a common belief that these are very different types of financing. Some people believe that one is better than the other or less expensive than the other. Let's explore some of the differences and similarities. The main difference between an equipment loan and equipment lease is that with the loan title to the equipment rests with the borrower and the lender secures a lien on the equipment. In an equipment lease the lessor (lender) owns the equipment and the lessee (customer) leases the equipment for a specific period. However in many capital leases the title to the equipment may pass to the lessee for as little as $1.00. This is called a "lease purchase". A loan is often structured with payments "in arrears" and with a first payment due 30 days from the start of the loan. Equipment leases are usually structured with payments in advance. It is a common practice for lessors to collect "first and last" payments in advance at the beginning of a lease, although a lease may be structured with just one payment in advance or can be structured with payments in arrears. In many types of loans, especially bank loans, the lender asks the customer to make a down payment. This is because most bank lenders are seeking to "collateralize" their loan. Most equipment leases offer 100% financing although some lessors require down payments based on credit risk parameters. While there can be different accounting and tax treatments for loans and leases borrowers and lessees should obtain advice from an accounting or tax professional regarding specific treatment of their loan or lease. Equipment loans sometimes are presented with requirements and terms such as down payments, annual fees, documentation fees, "points", compensating balances, restrictive covenants or floating rates. All of these and any other requirements should be considered carefully for the impact to the overall payments or interest paid. Equipment leases sometimes require advance payments, deposits, end of term options or obligations, documentation fees, or renewal fees or "auto-renewal" conditions. Lessees should consider the impact of any such requirements and the impact on the rate or total amount paid. One of the best ways to compare loans to loans, leases to leases or leases to loans is to compare the total of payments, any down payment, end of term payments or obligations and any fees and consider the total amount paid over the term of the loan or lease. Don't automatically assume a loan or a lease is less expensive. And, as with everything remember to negotiate with your lender or lessor. In summary comparison shopping and negotiating for your best deal will serve you well. Always investigate any organization and be sure they are established and reputable. If a proposal appears "too good to be true" then it probably is.