Unrestricted Funds: The Stairway to Flexibility

The Greater Anytown All-Needs Association is in trouble. Individual, corporate and state funding has dwindled in recent years. And the 501(c)(3) organization doesn’t know where the money will come from to pay its bills — and its staff — next month.

Greater Anytown has over $2 million in endowments, but all of these funds’ earnings are earmarked for food and shelter programs. And a recent bequest of $450,000 is restricted for funding educational activities for the next 10 years. What a pickle the 20-year-old nonprofit has found itself in!

Wanted: Funding without strings

The above example is fictitious and, with responsible planning, could likely be avoided. But it illustrates an elementary point: Charitable organizations need cash to carry out their daily operations. And having an adequate and steady stream of funds without strings attached — also known as “unrestricted funds” — is the best way to keep a charity’s operations and programs strong and sustainable.

Unlike temporarily or permanently restricted funds (see related post “Know Your Funding”), unrestricted funds can be used to cover the cost of operating expenses, such as rent, utilities, salaries and other day-to-day expenses. The grants and individual donations a nonprofit receives for general operating support allow it to refocus its efforts from raising funds to improving its programs and responding to emerging community needs.

Not always an easy task

Before an organization sets out to solicit unrestricted funds from individual and corporate donors, it should understand what it’s up against: There’s a public sensitivity toward nonprofits that spend too much money on administrative costs and too little on programs that fulfill their mission.

To secure funds without restrictions, prove to donors that you’ll use their money wisely. One way to do that is by presenting a healthy program service expense ratio and results-focused information on your Form 990, which you should make publicly available.

Direct is desirable

When asking for unrestricted funds, being direct is best. The University of California at Los Angeles, for example, is clear in telling alumni that its UCLA Fund is a collection of approximately 70 unrestricted funds that help it in myriad ways.

Also explain in your fundraising materials how unrestricted gifts offer greater flexibility than restricted gifts and how they help ensure you have adequate funds to keep the doors open. Moreover, encourage donors to make multiyear commitments for unrestricted gifts.

Ask funders to designate their donations “as unrestricted funds that help the organization.” You also might consider naming a fund after a family or individuals who only give unrestricted funds. It might just help encourage contributions of this type.

Sometimes grantors, such as government agencies, require that funds be restricted to a particular program or function. If that’s the case, you may still be able to factor in an administrative component of, say, 8%–10% to help cover operational costs.

Widen your net

Even with unrestricted funds, make sure you’re involving a variety of funding sources. If one large source of unrestricted funding dries up, for example, you’ll still have a number of other sources to draw from. Look for and identify new sources each year that fund organizations with missions on a par with yours.