For nonprofit professionals, identifying funding sources and deciding on the right funding model for their organization is one of the most challenging tasks at hand. Making decisions about the right approach to handling nonprofit finances is not easy.
Every organization needs money to stay afloat. Nonprofits are no exception to this rule. Money is a frequent topic of conversation amongst nonprofit professionals, and discussions about finances become even more heated during economically unstable times.
On one hand, there is seemingly a multitude of funding models to choose from – which can create some confusion. On the other hand, some nonprofits still feel ‘stuck’ and limited in their options.
What is a “funding model”?
Bridgespan defines a “funding model” as a methodical and institutionalized approach to building a reliable revenue base that will support an organization’s core programs and services.
In essence, a nonprofit “funding model” combines different funding sources into a constellation unique to every nonprofit. For example, one nonprofit might be funded 50% through grants, 30% through events, 15% through a membership program, and 5% through in-kind donations. Another one might be 70% funded through a major donor program, 20% through direct mail fundraising, and 10% through events. Different types of nonprofits are suited to different funding sources, depending on their mission and programs.
How to choose the right “funding source” for your nonprofit?
While it’s a common practice among most nonprofits to seek funding from multiple sources, research has shown that 90% of the largest nonprofits have embraced funding models built around a single dominant source of revenue.
We often hear it’s good to “diversify revenue streams”. But it can be hard to know what this really means in practice.
5 Steps to Select the best Funding Source for your Nonprofit:
Step 1: Plan, don’t firefight.
Many nonprofit organizations are guilty of reactive fundraising. Nothing is a substitute for thoughtful planning. Take some time to think about your funding model before you start going through the motions of fundraising. If you’re already raising funds, you can take the time to reevaluate your funding model.
Step 2: Assess and evaluate.
Start from where you are. Take a look at what you’re already doing. Realistically assess your current funding sources. Are they all aligned with your mission, vision, and values? Do they all deliver a good return on investment? Is there space for investigating other funding sources? What about moving away from some?
Pro tip: Data is your best friend here. Pull up relevant metrics and assess your fundraising efforts.
Step 3: Explore.
Organize brainstorming sessions with your team. Get creative and think outside of the box. Look at what other similar organizations are doing and see if there’s something that could work for you.
Step 4: Analyze.
Consider how much you can realistically fundraise from each funding source. Narrow down your brainstorm to a set of funding model options that are sustainable, replicable, and feasible.
Step 5: Select and begin.
Commit to pursuing one or two of the models on your shortlist and develop an implementation plan that will make your funding model plans actionable.
A thought-through and well-defined funding source can help your organization better position itself to attract funds, ensure long-term sustainability, and increase impact.
By intentionally choosing a funding model, you can strategically focus your development efforts on the most promising funding sources and build the internal capacity needed to make the most of them.
6 Main Funding Sources nonprofits can use to fulfill their mission:
1. Individual Donations
Of all donations made to nonprofits, 71 percent come from individuals. (The Balance)
Individuals gave more than $309.66 billion in 2019, according to NP Trust, making individual charitable contributions one of the best nonprofit funding sources. Individual giving is predicted to increase by 4.7% in 2021 according to Philanthropy Outlook.
For this reason, it’s wise to focus on individual donors and make them a central focus of your funding model.
Individual donors can make one-time or recurring donations. They also give in a variety of ways: online and offline, through events, auctions, planned giving, and more. When it comes to individual donations, it’s important to cover all your bases, since individual gifts make up such a big part of a nonprofit’s funding. For the most part, this is a very effective funding source, particularly for those organizations with large marketing budgets and those with causes that have a wide appeal (e.g. cancer).
2. Grants
Nonprofits can apply for grants from the government at local, state, and federal levels as well as private and public foundations. Generally, you are not required to repay any money awarded to you through a grant. In almost every country in the world, in order to be awarded a grant, your organization needs to have charitable/nonprofit status.
Often, grants will be restricted to a certain sector, location, or type of programming. For this reason, nonprofits must search for grants appropriate for their organization and apply for consideration.
Here are some of the main types of grant-giving organizations:
- Governments
- Public charities
- Community foundations
- Family foundations
- Private foundations
Every grant-giving organization will have different requirements, and those can also depend on the country in which your nonprofit is registered.
Pros
- Grants can fuel large projects, enabling large-scale societal impact that wouldn’t otherwise be possible.
- Grants from a government agency can give your organization more credibility, which is helpful in securing more nonprofit funding from other sources.
- Most grants require no repayment as long as funds are spent as outlined.
Cons
- Grants can take a significant amount of time. It first takes time to develop grant-writing skills that actually win grant proposals, it takes time to write a winning application, and then it can take time for you to see the funds.
- They come with specific conditions attached. These conditions apply to things like how exactly you can use the money. They also have specific reporting requirements that you should consider before applying. The conditions can also be related to particular outputs or outcomes or achieving agreed milestones.
- Grants are meant for specific short-term purposes, not to be a permanent nonprofit revenue stream.
Grants can be very appealing to nonprofits, but they do need some thought before you apply for them.
Things to consider before deciding to use grants as part of your fundraising/financing model:
- Are we able to invest resources in writing winning grant applications?
- Can we meet the grant conditions?
- Are the activities we would conduct consistent with our mission, our aims, and our strategy?
- Can the activity continue after the grant funding ends?
- Do we have other reliable income streams?
For some organizations, grants will be the ideal source of funding, whereas some will find them too cumbersome and restrictive. This is why it’s important to answer the questions above to make sure grant funding is what’s best for your nonprofit at this point in time.
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3. Corporate Sponsorships
Corporate sponsorships can be an excellent source of funding for nonprofits.
Corporations are usually keen to partner on projects to improve their philanthropic image or to work on becoming a more socially responsible organization. Corporate social responsibility (CSR) is more important than ever as consumers have become more likely to buy from socially responsible companies.
Different corporations will have different giving programs – some of which may work for your organization.
There can be some reluctance around partnering with corporations. However, there are many socially responsible corporations out there. As long as you accept donations from those aligned with your nonprofit’s mission and values, this can be a valuable funding source.
Value alignment is especially important since today’s donors demand transparency, and being very careful about whom you choose to partner with can safeguard your reputation later down the line.
4. Membership Fees
This nonprofit funding source won’t necessarily work for every type of nonprofit, but it’s worth looking at.
Consider the mission and the main activities of your nonprofit, and then decide whether you want to utilize the membership fees revenue stream.
This nonprofit funding source is particularly effective if your nonprofit can offer exclusive programs or benefits to its members.
Membership fees may be charged by some types of nonprofits. There are more than thirty types of nonprofits in the US Tax Code. Some provide services for their members for which they charge a membership fee. Examples include the 501(c)(7) Social Club and the 501(c)(6) Business Association.
Before deciding to use membership fees, in one capacity or another, as a funding source, ask yourself the following questions:
- Do we run programs that produce loyal supporters and evangelists?
- Can we invest in building long-lasting relationships with our beneficiaries?
- Do we have the capacity to reach out to beneficiaries after they finish using our services?
- Do we offer exclusive perks and benefits to justify a membership fee?
5. Selling Goods and Services
Another funding source your nonprofit can consider is selling goods and/or services. This funding source is subject to many regulations by the IRS.
Large, institutional organizations are more likely to benefit from fees and sales of products; while smaller charities depend on this type of revenue to a much lesser extent.
For example, you can sell branded goods to bring revenue to your organization. These items typically include t-shirts, tote bags, mugs, cookies, and other items. For example, Goodwill Industries is probably the largest nonprofit retailer.
Many nonprofits also charge fees for some of their services.
E.g. Hospitals bill patients, museums ask for admissions fees, theatres sell tickets, civic organizations charge dues, colleges require tuition and so on.
Here are more examples of selling goods and services:
- Selling tickets to events
- Creating and selling publications
- Selling in-house expertise e.g. writing, training, consultancy
Nonprofits can trade in most countries. However, if selling goods and services make up a significant portion of your budget, seek expert advice. If these activities are not related to your primary purpose, there are charity and tax law implications. Keep track of the percentage of your organization’s income that comes through goods and services. Earned income must be related to the mission of the organization, or it can be taxed as unrelated business income.
This can be a great source of income for your nonprofit, but as always, this funding source is not always applicable to every nonprofit.
6. In-kind Donations
In-kind donations will not be helpful to every type of nonprofit but can be an invaluable source of support for nonprofits like animal shelters, homeless shelters, safe houses, or humanitarian relief organizations.
Examples of in-kind donations include food, clothing, and medicine. If in-kind donations work for your organizational model, they can save you many dollars. For example, if your organization seeks to bring food and water into areas struck by natural disasters, getting in-kind supplies is most certainly useful.
It can be the case that you can’t directly use the in-kind donations for your programs. In this case, you could always use them in auctions (depending on the type of items). If you choose to do this, you have to clearly communicate (ideally on your website) which items you’re able to accept, and where are your collection points – if not at your offices.
It’s important to note that in-kind donations do not only include items like food, clothing, and medicine. An in-kind donation can be someone delivering a speech or a workshop for free or someone building your website at no cost.
It’s important to keep in mind that in this article we’ve outlined possible nonprofit funding sources, not necessarily financial models for running a nonprofit. If you’d like to learn more about financial models, read this article By William Landes Foster, Peter Kim, and Barbara Christiansen.
When it comes to securing funds for your nonprofit, you should always make sure to have a plan in place. Invest in relationships with donors, whether they are individuals, foundations, corporations, or government funders. All of these relationships take time to develop and need to be cultivated. You should respect every kind of support.
We hope this article helped you begin to understand your options so you can start choosing your ideal funding sources.
Whichever model you choose, it’s important to make sure it is right for your nonprofit – the right funding model should help you deliver your mission and sustain your activities.
Please reach out to our Donorbox team if you have any questions or concerns that we might help you with!
Written by Ilma Ibrisevic and published on Donorbox