Are Your Financials Bank-Ready?
Solid financials and bank-ready financials are not the same thing. Here is what lenders look for, why P&L transfers trip them up, and how to get ready before you apply.
ChurchBiz serves a wide variety of churches and Christian ministries, and most of the financials we work with are built for the internal use of the ministry. Sometimes we inherit them that way and sometimes we set them up that way ourselves, and in both cases we're building something that serves the people who actually have to read it, which is usually a pastor, a board, and a finance team. That approach works well for a lot of our churches and it produces solid financials. It just doesn't always mean those financials are bank-ready.
Churches have a few different ways to track designated funds, and we see all of them in the books we take over and use several of them in the books we build. Let's say a church is raising funds for a new building project but doesn't want that giving to inflate their general tithes and offerings. There are three ways we commonly see that giving recorded so it doesn't affect the P&L (Statement of Activity).
First, they could record those donations directly to an equity fund on the balance sheet titled "Building Fund." This is a simple, clear approach that lets them watch the fund grow on the balance sheet without touching the P&L. They can then book any expenses paid out of those proceeds against that fund. (Some of those expenses may need to be capitalized, but that's another topic.)
Other churches may decide to record that income on the P&L while maintaining a transfer account that sweeps it to the balance sheet fund. In this scenario, the church gets more visibility into building fund income while still removing the impact of that income on the P&L.
A third option is the class system. Here we would create a "Building Fund" class. When the income comes in, we would use an account code such as "Restricted Giving" and then assign it to the "Building Fund" class. With classes in place, a ministry can run their P&L and see a General Fund class reflecting typical operations alongside other classes showing departments or funds being tracked. Many churches will still want to sweep the additional income or expenses from those other classes off the P&L, which can be done through in/out transfer lines on the profit and loss.
In our opinion, all of these approaches produce solid financials. They give ministries the flexibility to record revenue and expenses in a way that helps them understand their true financial picture. Accounts are reconciled, and along with the church we know where everything is going.
If a church asks us which of the three to use, we usually point them toward one of the last two. Booking donations straight to equity is the simplest approach to set up, but it's also the one that tends to cause the most trouble down the road, because that giving never shows up on the P&L at all. We'll come back to why that matters when we get to the equity roll.
Solid Does Not Always Mean Bank-Ready
None of this means the financials are GAAP-compliant or bank-ready. GAAP exists to standardize financial reporting, down to the naming conventions, so that organizations can be fairly compared to one another. It's worth saying that GAAP does have a nonprofit section, and the restricted fund tracking your church is already doing is a rough version of what that section asks for. We mention that because we don't want anyone walking away thinking GAAP is a corporate standard with no bearing on ministry work. It's a much more formal and much more expensive version of something your church is already trying to do.
In our opinion, full GAAP compliance is neither important nor realistic for most churches, mostly because of what it costs to keep financials at that standard. If your ministry decides to spend $20,000 on an audit, you will likely have someone come in and measure your financials against GAAP standards, and for most churches that money would do more good somewhere else.
We'd also want you to understand what an audit is and what it isn't. An audit is designed to tell you whether your financial statements are materially correct. It isn't built to test your internal controls or to go looking for fraud, and the kind of fraud that actually hurts churches is usually small enough that an audit would never flag it. There are better tools for that work, like an internal controls review or a fraud risk assessment, and those are things we can help you with.
There is, however, a time when bank-ready financials could be critically important for a church or ministry. If your church is going to apply for a loan, you may need your bookkeeper or CPA to get your financials ready to send to the bank. This isn't because your financials aren't solid as they stand. It's because banks look for certain things to be in place, some of them pulled from GAAP standards, and they typically don't have the insight or the time to dig in and understand your transfer accounts or the items you booked directly to balance sheet funds.
Before sending your financials to your bank, we encourage you to have someone from our team review them. The issue will usually be one of three things:
- You are transferring amounts from the P&L to the balance sheet.
- Your building and land are not accurately recorded as assets, or the building isn't being depreciated.
- Your books are on a cash basis and the bank wants to see accrual.
P&L Transfers and the Equity Roll
If you are transferring anything from your P&L to the balance sheet, the bank will run into trouble when they try to work out what is called an equity roll.
For example, let's say your ministry ended 2025 with $500,000 in total equity. If you ran financials on July 31 and the balance sheet showed $525,000 in total equity, the bank would want your net income on the P&L to match that $25,000 increase exactly. But imagine your net income shows $12,000, and another $13,000 was transferred off the P&L during the year, booked either directly to equity or through a class sweep like the ones described above. The bank is not going to go looking for that transfer. They will only see that the $25,000 increase in equity doesn't match the $12,000 of net income. We would understand that your financials are still solid, but the bank is likely to get tripped up.
There's a second problem here, and it will cost you more than the confusion does. When the bank decides whether your church can afford the loan, they look at how much cash your operations generate compared to the payment you're asking to take on, and net income is where that math starts. In our example the church swept $13,000 off the P&L, so the bank sees a ministry that generated $12,000 when it actually generated $25,000. Your church ends up looking less able to make the payment than it really is, which can mean a smaller loan, a higher rate, or a lender who passes altogether. That's the biggest reason we care about getting these financials bank-ready.
So what do we do? For the version that goes to the bank, we reverse the sweeps so the restricted giving stays on the P&L. Net income then matches the change in equity, the roll ties out, and the bank can see everything your ministry brought in. We still show the restricted giving separately so they know which dollars are designated and which aren't, and going forward we prepare that view each month so it's ready whenever you need it.
None of this changes the reports your leadership and board are used to reading. Those can stay exactly as they are, because what we're describing sits on top of your books rather than replacing them. It isn't a difficult adjustment, but it's important to make sure it's done before you send anything to the bank.
Buildings and Land
For building and land to be accurately reflected on the balance sheet, we first need to make sure everything is recorded there: the asset, the loan (if applicable), and the equity. Ideally this is already on the balance sheet with depreciation added monthly or yearly. If it isn't, we can add it and catch up the depreciation schedule.
There are a couple of things worth knowing here. Land is never depreciated, so it sits on the balance sheet at what you paid for it while only the building depreciates, which means the purchase price needs to be split between the two. And if your building was donated, or if it was built largely by volunteers, it takes a little work to establish a cost basis. We've done this a number of times and can walk you through it.
Cash Basis and Accrual Basis
Most of our churches keep their books on a cash basis, and for internal use that usually makes good sense, because it matches the way a ministry actually thinks about money. You see what came in this month, what went out, and what's left in the bank.
Banks will often want to see accrual instead. They want the bills you owe but haven't paid yet, along with the income you've earned but haven't collected yet, showing up on the balance sheet. On a cash basis none of that appears, so the bank can't see the full picture of what your ministry owes.
This doesn't mean you need to convert your books. In most cases we can prepare an accrual view for the bank while your day to day reporting stays on the cash basis your leadership is used to reading. If your lender tells you they want accrual statements, let us know and we'll take care of it.
What the Bank Will Ask You For
Every lender is a little different, but most will ask for some version of the same list:
- Two or three years of year end financials, both the Statement of Activity and the Statement of Financial Position
- Current year to date financials
- A debt schedule showing every loan, the balance, the rate, and the monthly payment
- Board minutes or a board resolution approving the loan
- Your most recent Form 990 if your ministry files one
- Recent bank statements
- A budget for the coming year, and sometimes a projection showing how you plan to make the payment
If you can gather these while we're getting your financials bank-ready, the whole process tends to move a lot faster.
Give Us Four to Six Weeks
If you know a loan application is coming, let us know four to six weeks before you need to send anything. That gives our team time to review the financials, make the adjusting entries, catch up depreciation if it's needed, and get you a clean set of statements without anyone having to rush. Catching up a depreciation schedule or reworking a year of transfers takes longer than most people expect, and having that runway keeps us from scrambling in the few days before your lender is expecting something.
Is Your Head Spinning Yet?
Don't worry. This is why we do what we do.
If you have already sent financials to a bank and they questioned them, don't panic. It's likely one of the issues we described above, and our team can help get them bank-ready.
If you haven't sent financials to a bank yet but plan to soon, just let us know, ideally four to six weeks out. Our team will work with that in mind and make the adjustments needed to get them bank-ready. Providing bank-ready financials is part of our service, and we'll get you exactly what you need to send to your lender.
If you're already a ChurchBiz client, reach out to your client service representative and tell them a loan application is coming. They'll get the process started with our team. If you're not a client yet and you'd like us to take a look at where your financials stand, fill out the form on our contact page and we'll be in touch.
Want to Go Deeper?
Our team walked through this whole topic on an episode of ChurchBiz Live.
Paid Hub subscribers get content like this every month, along with our full course library and template library in the training subscription.
You can have unlimited Hub users from your church. Just send us an email and we'll add it to your account for $20/month.
Loan Application Coming? Let's Get Ready.
Give us four to six weeks and our CPA-led team will review your financials, make the adjusting entries, and hand you a clean set of statements to send your lender.