In this blog from our banking partner Charity Bank, Azlina Bulmer provides a helpful guide to explain the terminology of social investment.
Charities and social enterprises that have successfully raised funds from social lenders or social investors, ahem, excuse the jargon, often tell me that part of the challenge was to break through a wall of technical words.
One CEO who has won several awards for her organisation told me she succeeded at raising different types of funding by constantly asking questions. But words that represent expertise and exclusivity can leave those who are not “in the know” a little confused and hesitant to ask what they mean.
At Charity Bank a big part of our ethos is supporting charities, social enterprises and organisations that have a charitable purpose with knowledge as well as finance. So, here’s a jargon-buster to get you through a wall of investor-type words. Grab a coffee and get stuck in from asset to unsecured loan.
Asset: something valuable that an organisation owns, benefits from, or has use of, in generating income.
Bridging loan: a loan to assist daily activities as an organisation waits for other funds (usually grants) to arrive.
Borrowing on credit: borrowing with an arrangement to repay later.
Capital gain: a profit from the sale of property or an investment.
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.
Crowdfunding: crowdfunding is a new way of funding ideas or projects online by borrowing funding from large numbers of people through websites. People choose websites depending on the type of funding they’re after, debt, equity or donations.
Collateral: collateral is the ‘insurance’ policy for the lender if things go badly and our loan is at risk of not being repaid; 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.
Community development finance institution: Community development finance institutions (CDFIs) are social enterprises that lend money to businesses and people who struggle to get finance from high street banks.
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 has a mission to use money for the common good. It lends exclusively to charities and organisations with a social purpose with the money its savers entrust to it.
Facility: the different types of loans a bank offers to support the operations of an organisation.
Financial returns: the surplus generated by an organisation that can be used for the benefit of an investor or shareholder.
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 to the lender.
Loan: a sum of money that is borrowed and expected to be repaid with interest.
Principal: a sum of money lent or invested, on which interest is paid.
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 finance /social investment: an investment that generates benefits to society as well as a financial profit or surplus.
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 benefits.
Social lender: a bank that lends to organisations with a social purpose.
Social impact bond: a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on part of the savings achieved to investors. If the objectives are not achieved, investors don’t receive a return and are not repaid. SIBs got their name from the fact that their investors are typically those who are not just interested in the financial return on their investment, but also in its social impact.
Social returns: the benefits to society generated by an organisation for the benefit of an investor or shareholder.
Term loan: a loan that is repaid in regular instalments over a set period of time.
Working capital: the money used in an organisation’s day‐to‐day operations.
Unsecured loan: a loan that is not supported by an asset pledged to the lender.
Azlina Bulmer is programmes and development manager at Charity Bank
This is an advertising feature.