Restricted vs. Unrestricted Funds for Nonprofits
Fundraising is the core of any nonprofit; it’s the lifeline needed to energize your business and keep it afloat, the key to keeping the metaphorical blood pumping through your healthy organization. While fundraising may seem simple on the surface – an upfront way to get money to your nonprofit via financial contributions – it’s actually quite complex. Understanding fundraising is imperative to the success of a nonprofit.
The funds you receive from grants or donors can fall into two categories: restricted and unrestricted. There are distinct positives and negatives to each type.
Restricted Funds: These funds are set aside for a particular use. Only donors may restrict funds, and once this is done, it is typically permanent. For example, an endowment is usually a permanently restricted fund. Grants are also mostly restricted. The interest such a fund earns can be used toward the donor’s selected intent, as well. Using restricted funds for purposes other than their donor’s purpose is illegal; a donor can sue or demand a refund.
Because the donor feels that he or she has power over where the funds will be used, it may incentivize him or her to donate more. For example, a donor who has a vested interest in opening a soup kitchen in a certain area of town may give a greater amount, knowing that these funds must legally go directly to the desired project.
A fund can also be temporarily restricted, meaning that there is a concrete time frame for using the funds for the earmarked purpose. For instance, a donor might contribute money to the construction of a building, and when the building is complete, any leftover money can be transferred into an unrestricted fund.
Unrestricted Funds: Unrestricted funds can be used toward anything the nonprofit deems necessary. These funds are incredibly important, as they can be used for “unglamorous” but necessary expenses like overhead costs. Unfortunately, only 20% of funding for United States nonprofits is flexible.[1] Unrestricted grants are rare and extremely competitive
It’s very important to diversify your funding; unrestricted funds can be critical to the everyday operations of your nonprofit, while restricted funds can assist with specific projects. When budgeting, be sure to separate restricted and unrestricted funds. Knowing exactly how much money is available in each type of funding can help with proper allocation of funds.
When soliciting donations on your website, via mail, or at events, you may choose to include a clause that specifies that the donations will go to wherever the organization best sees fit. This will give your nonprofit the flexibility to categorize the funds as “unrestricted.” Alternatively, you can empower your donors by providing a space in the donation form where they can write in how they want the money used. This will provide restricted funds, but as mentioned earlier, you may find that donors are more generous when they can easily see the tangible results of their contributions.
Want to learn more about the world of nonprofit funding? We’ve got a self-guided class for that! Check out our Grants Anatomy course for help learning about and writing grants.
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[1] https://theconversation.com/what-is-unrestricted-funding-two-philanthropy-experts-explain-164589