Nonprofit Funding Sources (Donor Types)

Funding comes from a variety of sources for nonprofits. Every nonprofit has a niche and a funding strategy to match. Even though your nonprofit may not use them all, it is beneficial to be familiar with the myriad of options. Add value at the next budget meeting by suggesting new and innovative ways to raise the cash your nonprofit needs by knowing the available funding sources.

Basic funding sources include:

• Individual donors
• Corporations
• Foundations
• Donor-advised Funds (DAF)
• Governments
• Other nonprofits
• Members
• Events and sponsorships
• Joint Ventures
• Social Enterprises
• Fees for services performed or goods provided
• Unrelated business income

Individual Donors

Often people think of individual donors as the first source of funding. Think of the local fire department going door to door to collect donations or the money you left on the giving basket at church. You are an individual donor.

This comes in a variety of forms though including small gifts (less than $25,000) to large gifts (more than $25,000), even endowments and estate gifts. Your nonprofit may use online crowdfunding or work with high-net-worth individuals for large donations in the millions.

Individual funding can have some innovative ways of giving. For example, a giving circle is when several high-net-worth individuals come together to fund a specific project.

Corporations

Corporations often support various nonprofits with grants restricted to particular purposes or provide unrestricted giving. This happens when a business wants to share some of their profit to better the world. As a for profit entity though, corporations will most likely select nonprofits who are working in an area that helps to uplift their for-profit work or is promoting a cause which will make them appear altruistic and increase public opinion.

Foundations

Foundations may be private or public charities and are grant-making organizations. This type of charitable organization may collect donations and then identify other nonprofits who are working to complete similar missions, or who are working in fields of interest to the Foundation to whom they make contributions.

Donor-advised Funds (DAF)

A donor-advised fund, commonly known as a DAF, is a giving vehicle for donors. The donor will give money to the DAF to receive an immediate tax benefit. Overtime, they will advise the DAF on the disbursement of the funds. An important difference with a DAF is that while the original donor may give opinions and suggestions for how to donate the money held by a DAF, ultimately the DAF has the variance power and makes the final decision, which may overrule the original donor’s wishes.

Governments

Governments all over the world give grants to nonprofits which benefit the constituents of their nation. They may also give to help other countries who have specific needs. Many times, they give to nonprofits in the form of a contract or grant to accomplish their goals.

While the United States Government (USG) is a large source of giving in the United States, individual donors and corporations also give billions each to charity. In many other countries, the vast majority is given directly by the government and very little is provided by individual donors. Depending on where your work is taking place, it is good to know the local funding sources.

In the US, recipients of federal funds are subject to the Uniform Guidance, (UG) a set of rules and regulations around federal grants. It is important to know these rules and regulations and to ensure the proper policies and procedures in place prior to the expenditure of any funds from a federal source.

Other Nonprofits

A nonprofit may win a large award which they will manage but for which they do not expect to complete all of the work required directly. To get the work done, the nonprofit organization who received the funding directly from a funder will ‘hire’ other nonprofits to complete part of the project. If your nonprofit receives this type of funding, it may be considered a contractor or a subrecipient. This is a great way to work with other nonprofits to accomplish a shared goal.

Subrecipients of funds which originated from a federal agency are required to know and follow the UG, just as if it had received funding directly from the federal agency.

Members

Depending on the purpose of the nonprofit, it may be funded by membership dues. This is a way for an individual or entity to associate itself with a nonprofit, potentially receive some benefits, and to support a cause they believe in. The dues paid by members may range from a small to a significant portion of the nonprofit’s funding.

Events and Sponsorships

Nonprofits may hold events such as conferences, trainings, and galas to raise funding. The event may be solely to raise funding or may be in furtherance of the mission. Depending on the event, the nonprofit may charge to attend (event revenue) by selling tickets. Another great funding option is to allow another individual or entity to sponsor the event. The sponsor provides funding to the nonprofit either to support the cost of the event or as a general contribution to the nonprofit.  Sponsors typically receive acknowledgement related to the event such as being named at the event as a supporter. Note that if the sponsor receives something in return, such as tickets to the event, or an advertisement, that portion of the transaction is an considered an exchange transaction.

Joint Ventures

A nonprofit may team up with a for profit organization to form a joint venture, or a separate legal entity run by both organizations. Even though there are many legalities to consider when forming this type of organization, it can be greatly beneficial to both partners. For example, a nonprofit who promotes job opportunities may team up with a clothing designer to provide affordable business attire and promote the nonprofit.

Social Enterprises

Nonprofits may find a niche within their mission where a commercial enterprise is a viable way to work towards their mission. The beneficiary becomes the customer in a social enterprise. This is typically a subsidiary of the nonprofit organization and goods or services are provided at a cost which is enough to sustain the business without additional donor funding.

Fees for Goods and Services

When it makes sense, a nonprofit might charge a fee for a good or service that they regularly perform. Nonprofits may work in underserved markets giving them distinct skills that other organizations are not willing to invest in. These may be packaged and sold as a source of funding.

Unrelated Business Income

The vending machine at work, those t-shirts with a company logo and in some cases, the on-site gift shop are all examples of unrelated business income (UBI). This is a way of earning money which is considered unrelated to the tax exempt purpose of a nonprofit. While the UBI may be worthwhile, it is important to be aware that it may result in the need to file additional tax Forms and in taxes being due. Nonprofits must also take care that their unrelated business income is an insubstantial part of their total activities, so that they do not risk losing their exempt status.

Wrapping It Up

Nonprofits have many diverse funding options that may be pursued. It is important to note not all funding sources are tax exempt, some sources may require additional infrastructure, and some will have more complex accounting requirements. Each nonprofit should review its options and make a decision about what works best towards the fulfillment of their mission.