Nonprofit endowments are a long-term commitment for an organization. An endowment builds trust with donors, volunteers, and staff, and should be a part of your organization’s business plan. This article will help you learn more about this important nonprofit feature, as well as how to start one.
Nonprofit endowments can be a great thing for the longevity of an organization, but they can also be tricky to navigate. In this article, we’ll explain the pros and cons, spending policies, and steps to starting a nonprofit endowment.
Nonprofit endowments are donations pooled together and invested in the stock market. At the end of the year, only the investment income goes to the charity, but the principal amount remains in the market. Many smaller nonprofits may think of endowments as a pipe dream, but any size organization can start an endowment fund.
Your charity may receive an endowment gift from a major donor. Nonprofits must be prepared for this type of gift and begin contacting professional investment advisors for help with developing an endowment plan.
Pro tip: Nonprofits can encourage donors to invest in an endowment fund by creating a donation page on your website to explain and inform donors about the importance of such a gift.
In the below example, Friends United Meeting has created a fundraising page using Donorbox to raise donations for their endowment fund.
True endowments, also known as permanent endowments, are most common in larger institutions like colleges and hospitals. Major donors give these endowments and restrict them only to allow the charity to spend investment income. The principal gift must remain invested for long-term support. Major donors may look at this type of endowment to develop their legacy.
When a donor gives a true endowment gift, they may allow nonprofits to use the investment income in any way they choose. This unrestricted access will enable nonprofits to spend, save, invest, and distribute the annual gift according to their immediate needs.
Restricted endowment gifts mean the primary amount remains in the market, and the investment income is reinvested or spent according to the donor’s wishes. Endowments can be restricted to a specific program or service or used for individual scholarships.
SVGS Foundation has set up this endowment fund page on Donorbox to raise money and direct the funds toward Black colleges, universities, and scholars. Donors can also select on the donation form which family or individual asked them to contribute to this fund.
With term endowment funds, the donor determines when the organization can access the principal amount and leaves it to the nonprofit to decide whether to spend it or hold it in the market.
The organization’s board of directors establishes this endowment fund type to support the nonprofit’s long-term goals. Quasi-endowments allow the board to invest some of the organization’s funds to plan and sustain the charity over time. The board determines when the principal amount can be taken out and spent as part of the organization’s investment policy.
After deciding to start an endowment fund, your nonprofit must also include spending policies that the board and financial advisor must follow.
Investing in the market can get overwhelming, especially if you aren’t an expert. Before hiring a financial investor to make vital decisions regarding your endowment, your board will want to educate themselves and decide which type of investments the financial manager can make and how aggressive they can be.This will be part of your organization’s investment policy.
Pro tip: Be sure to include a specific rate of return or yield when deciding on long-term investment goals.
One perk of an endowment is the reliable funds your organization receives at the end of each fiscal year. When creating endowment policies, it is crucial to determine the exact amount or percentage your organization can take from the fund at the end of each period.
Most nonprofit withdrawal policies have an annual withdrawal limit. This limit ensures you’re not over-withdrawing and running out of the collected funds within a year.
The most important policy may be how these funds can be used. If a donor has started the endowment, they will likely decide where the money will go. If your board has set up board-designated endowments, they can look at ways to use these funds to not only support the organization’s vital financial needs but also strengthen connections with your community. An endowment for scholarships will use the investment income to pay for annual scholarships and remind and excite donors and community members about your work.
The Woods Family Endowment Fund clearly specifies that these funds will go toward the development of music in the Beckley-Raleigh county area. This kind of clarity is what nonprofits, as well as donors or boards, need to provide when they set up an endowment fund.
Charitable endowments are another one of those fundraising tools that look like a no-brainer, but every decision has pros and cons.
A nonprofit endowment builds trust with donors, volunteers, and staff. An organization cannot be healthy if its team is always concerned for the future. This is probably the most vital part of creating an endowment for your organization, but several other perks are involved.
Foundations are always interested in investing in nonprofits with an eye to the future. Organizations with one or two endowments will automatically catch the eye of a foundation. Remember to write your grant application accordingly, so the right information catches the eye.
Nonprofits are unfortunately often strapped for cash. Some donors, board members, volunteers, and staff may see endowment funds as lost money for the organization. People who work with the organization or are watching from the outside may find it difficult to understand why your nonprofit would want to start an endowment when you’re having trouble paying salaries or keeping the lights on.
Other cons to endowment funds include –
Pro tip: Don’t put too much in your endowment. If your board wants to start an endowment fund, help them understand how it will look from the outside. Make sure most of your funds are used for the organization’s primary needs first.
Business plans help a nonprofit lay out the organization’s financial goals and how they can meet them. It also provides a blueprint of how to run the organization, addresses the feasibility of your organization and fundraising model, and helps plan for the nonprofit’s income.
Once you have a better idea of your organization’s economic realities, you can see where an endowment fund can fit and explain its usefulness to the larger population.
Your board is responsible for the finances of your organization. If you’re having trouble convincing your board to start an endowment, you can share how it can give your board a little breathing room instead of always being in survival mode.
Start discussions with your board about where an endowment can fit and how it will help your organization’s budget. Endowment funds can provide reliable income for maintenance and other annual costs.
When explaining how an endowment can support the organization’s financial health, include a cash reserve and endowment in the conversation. Cash reserves are more accessible and safer when your nonprofit hits tough times. The addition of this reserve will make your board feel safer and understand the importance of the fund. Board members may be more open to creating a cash reserve and endowment together.
Pro tip: Start by investing more in the cash reserve and direct any excess funds from your reserve into a quasi endowment.
Financial experts are a smart investment when starting an endowment fund. Look for Registered Investment Advisors (RIA). These individuals support their clients by creating an investment policy and acting in their best interests.
Major donors often look for ways to build a legacy. Endowment funds are an excellent way to provide naming rights for their gifts. Nonprofits can use capital campaigns to ask for endowment gifts. This donation’s investment income can provide maintenance and upkeep for the building for years to come. Prospect research will help you determine the best donors to contact about the endowment fund.
The Wye River Upper School has set up the below fundraising page to appeal to donors to contribute to their endowment fund. They’ve also suggested different donation amounts. It reflects the depth of their prospect research in terms of donors’ giving abilities. Check out this example for the apt description and the simple recurring donation form they’ve chosen for fundraising.
Endowments can strengthen an organization’s financial health and relationships with its donors. If your organization is looking for ways to step out of survival mode and is ready to focus on the future, a nonprofit endowment may be an excellent investment.
You have seen examples of how various nonprofits and organizations are using Donorbox to set up their endowment fund pages online. Donorbox is easy to get started, simple to use, and highly affordable for all, with no need for documentation and no setup cost. 80,000+ nonprofits are using us to run their fundraising campaigns, set up membership programs, sell tickets, manage donors, and more. We’ve helped our nonprofit users raise over $2 billion in donations already. You can become a part of this success story by signing up for free and choosing from a plethora of our powerful features.
Wondering how to collect more donations to be able to set up an endowment fund? Check out Donorbox Premium! Our expert fundraising coaches, dynamic tools, and adept techies will help you fight challenges and multiply donations to your organization. Pricing is personalized for each nonprofit. Book a demo today!
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Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
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Kristine Ensor