Capital Source

A capital source is the money behind a loan: the fund, investor, lender or grant that supplied the dollars. Nonprofit loan funds and many Community Development Financial Institutions (CDFIs) instead build a "capital stack" from several outside sources, each with its own terms.

Common sources for a mission lender include:

• CDFI Fund awards. Grants, loans or equity from the US Treasury program under an assistance agreement with performance goals and reports.
• Bank capital. Loans, deposits, grants and equity equivalent investments (EQ2s). An EQ2 is a long-term, fully subordinated loan with a rolling term, so it acts like equity to a CDFI's senior lenders. US banks can get credit under the Community Reinvestment Act (CRA) for these investments.
• Foundation money. Grants and program-related investments (PRIs), made mainly to advance a charitable purpose rather than to earn income.
• Government programs. Money that seeds a revolving loan fund, where repayments are lent again under the program's rules.

Some money is restricted. A grant might only fund loans in one region. Under nonprofit accounting rules, those dollars sit in net assets with donor restrictions until the lender meets the restriction.

Worked example. A loan fund makes a $100,000 loan, paid 70% from a bank loan and 30% from a grant restricted to rural borrowers. The loan carries both tags: $70,000 and $30,000. When the borrower repays $10,000 of principal, $7,000 goes back to the bank pool and $3,000 to the restricted pool.

Why it matters for lenders

Each source wants to know how its money was used. Bank lenders often set loan covenants, such as a minimum net asset ratio or a ceiling on delinquency. Foundations may require a yearly accounting of how funds were spent, and a federal award may require loan-level data on every deal.

If a loan is not tied to its source, the lender cannot prove a restriction was met or show how much of each pool is lent out. It may even report the same dollar to two funders.

How it works in practice

At a CDFI, the loan officer checks which sources fit a deal before approval. A rural loan may fit a rural relending program; a large one may exceed a microloan cap. At booking, the closer records each source and its share, and repayments split the same way from then on.

Finance reviews committed, drawn, repaid and available balances by source every month. Moving a loan to a different source after booking should require approval and leave a history, because it changes what was already sent in funder reporting. Tags kept in a separate finance workbook drift out of date, and every report becomes a rebuild.