Loss Reserves
That portion of a fund's earnings or permanent capital designated by the
board of directors as a reserve against possible loan losses and, as such,
unavailable for lending purposes. Generally accepted accounting principles
governing for-profit and regulated financial institutions require that
loan loss expense be deducted as an annual expense on an accrual basis and
that the loan loss reserve be shown as a contra asset reducing loan
assets. To date, no accounting convention has been established to govern
loan loss reserve accounting for unregulated nonprofit institutions. The
technical treatment is to establish the reserve through periodic charges
against earnings, and actual losses, when and if incurred, and are charged
against the reserve. For balance sheet purposes a loan loss reserve
(should) be shown as a deduction from the loan portfolio to suggest that
its true economic value should be reduced by the estimated loss exposure.
Market Rate
The rate of interest a company must pay to borrow funds currently.
Program-related investments generally are offered at below market rates or
at no interest rate.
Negative Covenants
Statements of actions or events of the borrower must prevent from
occurring or existing, for example, additional borrowing without the
lender's consent.
Net Working Capital
Current assets minus current liabilities.
Net Worth (Fund Balance in nonprofit. organizations)
Total assets minus total liabilities. Aggregate net value of the
organization.
Opportunity Cost
The potential benefit that is foregone from not following the best
(financially optimal) alternative course of action.
Portfolio
A combination of assets held for its investment benefits, including
financial and non-financial returns. The asset mix is usually varied in
kind and size to maintain an acceptable level of risk and return.
Principal
In commercial law, the principal is the amount that is received, in the
case of a loan, or the amount from which flows the interest.
Program-Related Enterprise
A business or enterprise designed to promote the social purpose goals of
an organization as well as generate revenue. Among nonprofits, products
and services are usually, but not exclusively, identified with the purpose
of the organization. Activities can range from fee-for-service charges to
full-scale commercial ventures.
Program-Related Investment
Broad, functional definition: A method of providing support to an
organization, consistent with program goals involving the potential return
of capital within an established time frame. In the context of this study,
program-related investments include loans, loan guarantees, equity
investments, asset purchases or the conversion of asset(s) to charitable
use, linked deposits, and, in some cases, recoverable grants.
Promissory Note
Promise to pay. Written contract between a borrower and a lender that is
signed by the borrower and provides evidence of the borrower's
indebtedness to the lender.
Receivables
Accounts receivable; an amount that is owed the business, usually by one
of its customers as a result of the ordinary extension of credit,
Recourse
Refers to the right, in an agreement, to demand payment from the person
who is taking on an obligation. A full recourse loan refers to the right
of the lender to take any assets of the borrower if repayment is not made.
A limited recourse loan only allows the lender to take assets named in the
loan agreement. A non-recourse loan limits the lender's rights to the
particular asset being financed -- an approach that is common in home
mortgages and other real estate loans.
Recoverable Grants
Funds provided by a philanthropist to fulfill a role similar to equity. A
recoverable grant may include an agreement to treat the investment as a
grant if the enterprise is not successful, but to repay the investor if
the enterprise meets with success.
Restructure
A revision of a financial agreement that alters the conditions or
covenants of the original agreement. For example, parties may agree to
restructure a loan agreement, easing the payment schedule, when a borrower
is delinquent or otherwise faces default on a loan.
Roll Over
Prior to or at the time of the maturity of an investment or loan, the
interested parties agree to continue to carry over the investment or loan
for another, successive period of time.
Security
A pledge made to secure the performance of a contract or the fulfillment
of an obligation. Examples of securities include real estate, equipment
stocks or a co-signer. Mortgages are a form of security with strong legal
standing, because they are publicly registered following a formal legal
procedure. A mortgage gives the lender holding a mortgage security the
right to reclaim the asset being financed, if repayment is not made.
Senior Debt
Debt that must be repaid before subordinated debt receives any payment in
the event of default.
Subordinated Debt (Junior Debt)
Debt over which senior debt takes priority. In the event of bankruptcy,
subordinated debt-holders receive payment only after senior debt is paid
in full. A subordination of security interest in property allows another
creditor to have the rights to the proceeds of the sale of that property
before the claim of the subordinated creditor.
Term
Refers to the maturity or length of time until final repayment on a loan,
bond, sale or other contractual obligation.
User
A non- or for-profit entity that receives a program-related investment
directly from a funder for use in its programs or ventures.
Warranties
Statement attesting that certain statements are true. For instance, the
borrower may warrant that it is a corporation, that it is entering into
the agreement legally and that financial statements supplied to the bank
are true.
Working Capital
Technically, means current assets and current liabilities. The term is
commonly used a synonymous with net working capital. The term often also
is used to refer to all short-term funding needs for operations (excluding
debt service and fixed assets). A company's investment in current assets
that are used to maintain normal business operations. Net working capital,
which is the excess of current assets over current liabilities is also
interchangeable with working capital. Both reflect the resources in
circulation to meet operating needs and obligations as they come due.
Write off
When an investment, such as a loan, becomes seriously delinquent or in
default and is determined to be uncollectible, the lender may choose to
charge the outstanding investment amount as an expense or a loss.
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