Should a Church Lend Money to Congregants?

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There are many circumstances where a church could be asked to loan money to a member of its community. A volunteer who spends a lot of time at the church asks for help paying for medical bills. A member needs help recovering from a house fire. A congregant is starting a local organization that will benefit the community and is looking for startup funds. Whatever the story, churches should be cautious about becoming lenders, for several reasons:

  • The risk of loss. The most obvious concern for any lender is that it won’t get repaid. Lending money isn’t just a question of the trustworthiness of the borrower. It’s also a gamble that the borrower will continue to be reliable into the future. If the borrower’s circumstances change and force a default, the church may have little recourse.
  • Deviation from the church’s mission. A church is not a bank. By getting into the business of lending, a church must be prepared to enforce the obligations the loan has created, including hiring a collection agent if the borrower simply refuses to honor its commitments. Some donors may question the decision to go into the lending “business,” even if the cause is good.
  • Tax considerations. Income from interest revenue could be subject to income tax due to being a source of income from a business that is unrelated to its core purpose. The church must be prepared for additional tax liability and paperwork.
  • Expenses. Properly documenting and administering a loan requires professional advice, which costs money and time. A truism in any transactional situation is that deals involving small dollar amounts can cost just as much as deals involving large amounts do. The church needs to have the budget to handle these costs built into its plans.
  • Fiduciary risk. Church leaders who are in a fiduciary role, such as the members of a management committee, owe a special duty to the church and its constituents to responsibly maintain the church’s assets. Each of the concerns raised above create special fiduciary questions for church leaders.

Despite these challenges, some churches may still want to go forward with a loan under special circumstances. Before offering a loan to anyone, a church should consult with an attorney as well as a tax advisor and an accountant to determine whether the loan makes practical, financial, and legal sense.   The Church Law Center of California serves religious and secular nonprofits. We can help your church evaluate the merits of offering a loan to a member. Call us today at (949) 689-0437 or reach out to us through our contact page.

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