Capital financing

Benefits theory applies to both capital and operating income; however, capital income involves a number of nuances requiring special attention. First, it is important to note the connection between capital funding and investment income; the latter derives from returns on financial capital accumulated as endowment or other invested funds. As a result, as discussed in Chapter 8, investment income is only indirectly connected with benefits and beneficiaries. However, the investment capital from which investment income is generated is more directly linked to benefits and beneficiaries. An arguable exception is accumulation of capital through retained net earnings, an internal strategy not linked directly to benefits and beneficiaries. Although even here there is an indirect link to beneficiaries through the operating revenues, such as fees or gifts, from which surpluses may be generated. Second, investment capital for endowments is just one of several forms of capital used by SPOs. In particular, while virtually all SPOs produce services as opposed to physical goods, thus requiring significant allocations of labor, they also require capital assets such as buildings or equipment. Indeed, SPOs in some fields of service are relatively capital intensive – requiring significant funding for physical plant. Third, different legal forms of SPO, for example, nonprofits versus social businesses, are more adept than others at attracting alternative forms of capital financing – for example sale of equity versus receipt of capital grants. Fourth, recent innovations such as social impact bonds, program-related investments, community bonds, community investment notes, crowd-funding, social investment funds, and new hybrid legal forms of SPO such as L3Cs, benefit corporations and community interest companies have been devised to bridge the barriers that reduce access of SPOs to various sources of capital.