Tuesday, May 14, 2019

Hey Fletch … Our finances have trended downward and we borrowed $20,000 from the unused balances of restricted funds. This caused some controversy on the church board. What is your counsel?

DRF—I have received so many questions about restricted gifts to churches. I’ve consulted with my friend Dan Busby, President of the Evangelical Council for Financial Accountability. Here are his thoughts.

Dan—This type of borrowing does occur, often referred to as intraorganizational loans. This practice should be avoided. Why? Churches are legally required to spend restricted net assets in a timely manner to further the intent and purposes expressed by the giver.

State laws generally require that a church demonstrate that a loan is prudent. If the loan is simply to fund operating shortfalls or reflects the church’s financial difficulties, the church’s board will generally have trouble demonstrating that a loan from restricted net assets is prudent when viewed as an investment of restricted net assets.

Although borrowing from restricted net assets should be avoided, if a ministry makes a loan of this type, financial reports provided to the board should clearly reflect the borrowing. The board should adopt appropriate policies to ensure the funds are repaid within a reasonable period of time. 

To learn more about borrowing from designated (restricted) gift balances, obtain a copy of The Guide to Charitable Giving for Churches and Ministries.