Plan an Impact Investing Loan Program

Common Impact Investment Scenarios

Organizations may use impact investment loans for:

• Affordable housing - Construction or acquisition loans for non-profit housing development corporations.
• Community facilities - Purchasing or renovating buildings for community services.
• Farm and food systems - Land purchases for community farms or food production facilities.
• Small business development - Loans to support business incubators or entrepreneurship programs.
• Equipment financing - Helping non-profits acquire necessary equipment or vehicles.
• Recoverable grants - The Loans feature can also track recoverable grants, where CommunitySuite issues the payment out as a voucher rather than as a grant initially.

The recommended approach for impact investment loans uses a single loan fund as a pass-through mechanism, with multiple funds contributing assets to a separate impact investment account. This structure aligns with CommunitySuite's loan functionality and minimizes operational complexity. Understanding this recommended setup may help guide your decisions as you plan for your own impact investing program.

Key Components of the Recommended Setup

• Single loan fund - One fund holds all loan receivables for the entire program.
• Impact investment asset account - Separate investment account (such as a money market) holds contributed assets.
• Participating funds - Individual funds contribute assets but retain ownership.
• Pass-through structure - Loan fund balance always nets to zero. Net zero means negative in assets plus positive receivable, which confirms the loan fund is functioning as a pass-through.
• Required GL accounts - Three new accounts, Loan Receivable, Loan Payable, Loan Interest, must be created as unique accounts and set as system defaults.
• Balance swap process - One-time transfer of assets from main investment pool to impact investment account using investment strategy adjustments and balance swap, followed by turning off manage cash.
• Line of credit loan type - Recommended for maximum flexibility with principal and interest payments, accommodates non-standard terms and early repayments. Fixed or variable loan types can be used when amortization schedules are calculated outside CommunitySuite and imported.
• Loan payment recording - Payments recorded through invoices created from the Loan Module and applied via profile payments.
• Interest allocation - Interest income from loan payments distributed to the funds in the impact investment asset account through revenue share based on each fund's contribution amount.

Program Participation

Do you want all fund holders and assets to participate in the loan program?

Or is this invite only into the loan program?

If All Funds Participate:

• Allocate a percentage from all funds with specific investment strategies.
• Uses a one-time enrollment process with investment strategies to allocate a percentage from all funds with a specific investment strategy.
• May require adding clear language in fund agreements allowing this type of investment.

If Only Invited Funds Participate:

• More complex to administer but provides fund holders with the option to participate.
• Can have annual enrollment periods where fund holders can opt in or adjust their participation.
• Fund holders decide what percentage or dollar amount of their fund's assets to allocate to the loan program.

Consider: Reviewing fund agreements to determine if a loan program is permissible or changes to agreements are needed.

Receivable Ownership

Do you want each of the funds to own a portion of the loan receivable?

Or is creating a pass-through fund to hold the loan receivable a possible path?

Recommended: Create a single loan fund that serves as a pass-through structure for loan activities.

CommunitySuite functionality only allows loans to be paid out of one fund and for one fund to hold the receivable. The recommended approach is to create an impact investing loan fund to process and track impact investment program activities.

• One loan fund holds all loan receivables for all loans in the program.
• Participating funds retain ownership of their contributed assets.
• Simpler accounting and tracking of loan activities.

How the Pass-Through Approach Works 
The loan fund holds the receivable, while participating funds continue to own the assets they contributed. The loan fund's balance will always net to zero---negative in assets plus positive receivable---which confirms the loan fund is functioning correctly as a pass-through.

Impact Investing Assets

Do you want the assets set aside for the impact investing/loan program in a different investment asset and investment account?

Recommended: Create a separate, stand-alone investment asset in CommunitySuite and a real-world account.

• Can be a money market account or an account in a less risky investment portfolio.
• Easier tracking of money in/money out and available loan capacity.
• Prevents unintended rebalancing into or out of loan assets.

Requirements for the Real-World Account:

• May not have the manage cash setting enabled, allowing transactions to flow directly in and out of the account without going through a main account.
• Must be able to issue checks or payments for loan disbursements.
• Must be able to receive all of the loan repayments.
• Should provide regular statements for reconciliation.

Consider: Talk with your investment manager about creating a separate account for impact investing. Some organizations use money market accounts to maintain liquidity and reduce risk.

Or do you want these dollars to stay in the same investment assets that they are currently in?

• Would you be able to transfer out of the investment asset quickly/on demand to pay the loan?
• Is there a lot of variability in this investment account?

Fund Holder Exit Strategy

Have you decided how you as an organization will handle the scenario of a fund holder leaving your organization that has contributed to the impact investment asset?

Does the fund holder get to take those dollars/assets with them?

Recommended: Do not try to return each bit of interest and principal back if a fund holder wanted to close their fund and leave and your organization did not have the cash back from the loan. Treat impact investment assets as illiquid, similar to real estate or privately held securities. Fund holders must wait until loans are repaid to receive their contributed assets back.

If you choose to return assets before loans are fully repaid, consider:

• If you give one fund holder back their illiquid asset, do you give all fund holders that option?
• Will you use a first-come, first-served approach, creating a queue for asset returns as loan repayments come in?
• Do you need to maintain a reserve pool specifically to accommodate exit requests?
• Will your organization make the impact investment asset account "whole" to replenish what the exiting fund takes out?

Some organizations talk about loan participation more as a grant commitment than an investment, setting the expectation upfront that contributed assets are committed to the program for the loan term.

Consider: Impact investments are illiquid and may not be immediately available upon exit. These assets are given out in loans and your organization may not have the cash in the account since it could be fully loaned out. How might your organization communicate this to fund holders before they participate? 

Have you thought about what you will do if a fund holder says that they no longer want to participate in the impact investment asset?

• Will you treat this like any other illiquid asset (real estate or privately held securities) that can't be made liquid quickly?
• Will you have a reserve held back to accommodate these requests?

Do you plan to loan out the full amount of the allocated impact investment assets right away?

• If not, do you want any earnings to go back into the impact investment asset account? Do you want all the participating funds to receive these earnings?

Visibility and Presentation

Do you want fund holders to see the Impact Investment Asset listed separately on the fund statements?

• Do you show investment assets on the fund statement?

If you show investment assets on fund statements:

• Impact investment assets will appear as a separate line item.
• The amount remains part of the fund's total balance.
• Consider adding explanatory text about illiquidity.

If you do not show asset detail on fund statements:

• Impact investments are included in total fund balance without specific callout.
• May need to provide supplemental information to fund holders.

Do you want the amount of the impact investment asset to still be included in the fund balance on the fund holders fund?

• If this is still considered to be part of the fund holders fund balance, should this be marked as an illiquid investment asset so that the fund holder does not try to grant out these dollars?
  • To mark assets as illiquid in CommunitySuite, set the Available for Cash percentage to 0% instead of 100%. This prevents fund holders from granting out these dollars from their fund. The Available for Cash setting should be configured on both the investment asset account and the Loan Receivable account.

Admin Fee Treatment

Do you want this amount to be included in admin fees or is it excluded?

• Or do you consider involvement in the Impact Investment/Loan program to be more like a grant and not an investment?

Include in Admin Fees:

• Include the impact investment asset of the funds that contributed to the impact investing.
• When a fund has a positive balance in the impact investment asset account, it is included in the admin fee calculation for that fund.
• The admin fees for participating funds are unaffected by how much is loaned out.
• Helps offset administrative costs of managing the loan program.

Example: A participating DAF family fund has a positive balance in the impact investment asset account, which means it is included in the admin fee calculation for that fund. The admin fees for the participating DAF are unaffected by how much is loaned out.

The pass-through loan fund would not have any admin fees assessed on it.

Exclude from Admin Fees:

• Potentially exclude the loan receivable from admin fees.

Loan Repayment

When the loan payments start to come in, how do you want the cash to be invested?

Do you plan to have the principal payments stay part of the impact investing asset? So that they could be loaned out again?

• Principal remains available to loan out again.
• Grows your lending capacity over time.
• Simpler accounting---no allocation back to individual funds needed.
• Treats impact investment participation as a long-term commitment.

Or do you want the principal payments to be returned to the fund holders original investment allocation (back to the standard investment pool)?

• This would require allocating each principal payment back to each individual fund.
• Increases administrative burden.
• May be required by your organization's policies.

Consider: For most organizations, the administrative complexity of returning principal does not justify the modest interest earnings on impact investment loans. However, if your policies require it, contact Support during setup to discuss implementation.

Does the interest income on the loan payments stay in the impact investment asset?

• Or does this go back to the main investment pool?
• Will this be your organization's decision or will you allow each fund holder to decide?

Recommended: Allocate to participating funds.

• Use revenue sharing to distribute interest and keep it in the impact investing pool/account.

Alternative: Keep interest in impact investment pool.

• Send the interest to the main investment pool or standard investment allocation based upon the investment strategy.

Do fund holders get to divest from the impact investment as payments start to come in?

• Can they remove their interest earned from the asset account?

Do you want the loan recipients to be able to make online payments of their loans?

• Online loan payments can be made via the Customers tab of the Portal, where customers can view and pay open invoices.

Type of Loan

What is the loan type - fixed, variable, LOC?

Line of Credit (LOC) - Recommended for Flexibility

Line of Credit loan type offers the most flexibility within CommunitySuite for 0% interest loans and/or recording principal payments separate from interest payments.

• This option would allow for easier early repayments and balloon payments due to having the option of an Invoice (interest only) and Principal Invoice (principal payments only).
• Best option if you have interest only payments as well.
• Principal payments are not calculated in CommunitySuite. Any amount can be entered on a monthly basis.

Fixed

Fixed loan type works well if you plan to maintain a consistent loan repayment schedule. If there is a balloon payment, use the import amortization schedule approach so the balloon payment is listed in the schedule.

• Does not allow for early repayments without adjusting the entire repayment schedule.
• Does not allow for a principal-only payment or monthly payment plus principal payment.
• Would require adjusting the whole loan schedule again if it was imported for the whole life of the loan.

Variable

Variable loan type works well if you plan to maintain a consistent loan repayment schedule. The variable loan type allows you to adjust the interest rate at any time in CommunitySuite.

• Does not allow for early repayments without adjusting the entire repayment schedule.
• Does not allow for a principal-only payment or monthly payment plus principal payment.
• Would require adjusting the whole loan schedule again if it was imported for the whole life of the loan.

Amortization schedules can be calculated in CommunitySuite or uploaded if they are calculated outside of the system.

Repayment Terms

Monthly? Quarterly? Lump Sum Principal Payments?

• Monthly payments: Provides steady cash flow.
• Quarterly payments: Less administrative burden, but longer wait between payments.
• Lump Sum Principal Payments: Principal comes back as a lump sum after a long period.
• Custom schedules: Can upload specific payment schedules.

Will you be charging interest or are all loans interest free?

Charging interest:

• Provides modest returns to participating funds.

Zero-interest loans:

• Maximum mission impact for borrower, similar to a grant.
• Fund holders receive no return on their participation.

Consider: A mix of interest and interest free loans depending on the project?

Download the complete planning document: Foundant Impact Investment Loan Program Planning.pdf

The checklist includes all questions from this article in a worksheet format for use in planning meetings and policy development sessions.

After establishing your impact investing loan policies:

1. Document your decisions: Create written policies that address all planning questions covered in this article.
2. Coordinate with your investment manager: Ensure they can create and manage the necessary accounts.
3. Communicate with stakeholders: Share policies with fund holders, investment committee, and board.
4. Set up CommunitySuite: See Loans for step-by-step configuration instructions.

Questions about policy decisions? 
Consider consulting with your legal counsel, auditor, and peer organizations that have established impact investment programs. Support can help with CommunitySuite configuration after your policies are established.