Jargon buster: loans and social investment

Posted in

Organisations that have successfully raised funds from social lenders or social investors often tell us that they were put off by the wide range of terms they came across.

So, here’s a jargon-buster to help you navigate the array of terminology:

Asset: something valuable that an organisation owns, benefits from, or has use of, in generating income.

Balance sheet: a statement of an organisation’s assets, liabilities and capital at a stated point in time. It details the balance of income and expenditure over the prior period.

Bond: a debt investment in which an investor lends money to an entity which borrows the funds for a defined period of time.

Borrowing on credit: borrowing with an arrangement to repay later.

Bridging loan: a loan to assist daily activities as an organisation waits for other funds (usually grants) to arrive.

Capital gain: a profit from the sale of property or an investment.

Capital: wealth in the form of money or other assets available for development or investing.

Capstone investor: the last investor whose investment secures the other investments and enables the project or fund to advance.

Charity bond: a formal debt instrument issued by a charity, usually at a fixed rate of interest, as an alternative to borrowing from a bank.

Collateral: collateral is the ‘insurance’ policy for the lender if things go wrong and the loan is at risk of not being repaid. This is an asset, often a property, that is pledged to the bank by the borrower when taking out a loan. If the borrower is unable to repay a loan, the bank can use the asset to recover losses.

Community share offer: a means of financing a community project by offering shares to people locally and elsewhere.

Community share: a share in a local project bought by a person generally within the community.

Debt finance: money that is borrowed with a promise to repay the amount borrowed, plus interest.

Dividend: a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).

Equity investment: money that is invested in an enterprise in exchange for a stake in the organisation, usually in the form of shares. Each share represents ownership of a proportion of the value of the company. Equity investors typically receive a sum of money paid out of the organisation’s earnings each year and/or if the organisation is sold or if they decide to sell their shares to other investors.

Ethical bank: not all banks have profit as their overriding objective. Several banks make it their mission to create social and environmental benefits, by carefully choosing which companies and projects they provide finance to. For example, Charity Bank is a bank for good. It uses the money its savers entrust to it to lend to charities and organisations with a social purpose.

Facility: the different types of loans a bank offers to support the operations of an organisation. Loan is often the most appropriate word to use.

Financial returns: the monetary surplus generated by an organisation that can be used for the benefit of an investor or shareholder.

Grant: an amount of money given by an organisation usually for a specified purpose. Grants are typically conditional upon certain criteria being met and often require ongoing reporting to the grantor.

Interest: interest is a fee paid by a borrower to a lender to pay for the use of borrowed money. When money is borrowed, interest is typically paid to the lender as a percentage of the amount owed. Interest usually accrues on a daily basis but is charged quarterly.

Investment readiness: investment readiness, or becoming investment ready, is making your organisation capable of taking on social investment or a loan. An investment ready organisation will have the skills required to identify, apply for and secure repayable finance.

Liability: an organisation’s debt or financial obligations to another party.

Loan: a sum of money that is borrowed and expected to be repaid with interest.

Overdraft: a deficit in a bank account agreed with a bank. The organisation can borrow when it needs the funds. Rates are usually higher than for a standard loan.

Patient capital: capital invested with a long-term view. The investor is willing to forgo an immediate return for a higher return in the future.

Principal: a sum of money lent or invested, on which interest is paid.

Profit and loss account: a statement where an organisation’s income and gains are credited and its expenditure and losses deducted, to show the net profit or loss over a specified period.

Restricted funds: money that can only be used for specific purposes.

Secured loan: a loan in which the borrower pledges an asset (most often a property) which the bank can use to recover losses if the loan isn’t repaid.

Senior debt: a loan that is secured by an asset, often a property that has been pledged to the bank by a borrower. If the borrower is unable to repay a loan, the bank can use the asset to recover any losses. Lenders that offer senior debt are the first to be repaid when an organisation goes bust.

Social enterprise: a social enterprise is an organisation that trades to improve lives and the environment. Social enterprises make their money from selling goods and services and typically reinvest their profits back into the business, charity or the local community.

Social finance / social investment: an investment that generates benefits to society as well as a financial profit or surplus.

Social impact bond: a formal debt instrument issued by a charity or other social sector enterprise, where the financial return including repayments is dependent upon the achievement of specified social outcomes, often under a contract with the public sector.

Social impact: the effect of an activity or investment on people and communities.

Social investor: an individual or organisation that puts money into an organisation in order to create benefits for society and receive a financial return. The cash return is often secondary to the social impact.

Social returns: the benefits to society generated by an organisation for the benefit of an investor or shareholder.

Social sector: non-governmental organisations, including charities, social enterprises, voluntary and community groups.

Standby facility: an agreed amount of money that can be borrowed, in full or in part, if and when an organisation needs it.

Subordinated or junior debt: debt that has a lower priority in the event of the issuer's default than another debt claim on the same property or asset.

Term loan: a loan that is repaid in regular instalments over a set period of time.

Unrestricted funds: money given or lent to a social sector organisation by a donor or lender that the organisation is free to use for any purpose.

Unsecured loan: a loan that is not supported by an asset pledged to the lender.

Working capital: the money used in an organisation’s day-to-day operations.

Charity Bank 2