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 models, depending on their mission and programs.
How to choose a “funding model”?
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.
Steps to select a funding model 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 to 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 yours.
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 model 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.
Nonprofits can use these 6 Main Funding Sources to help fulfill their mission:
- Individual Donations
- Corporate Sponsorships
- Membership Fees
- Selling Goods and Services
- In-kind Donations
1. Individual Donations
Of all donations made to nonprofits, 71 percent comes 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).
1.1. Types of individual donors
Tap into all categories of individual donors, from major donors to regular donors.
1.1.1 Major donors
Sometimes, a nonprofit venture can begin with a large cash infusion from a single major donor. This is great to get a nonprofit from the idea phase to implementation. If you started out this way or you currently rely on a single major donor for funding, think and plan carefully for the point at which you will need to transition to new funding sources.
Although you don’t want to be overly reliant on major donors, it’s still smart to ensure that your fundraising model nurtures major donors.
Cultivating major donors is a bit of a different ordeal compared to cultivating regular donors. To prospect, major donors, consider investing in a wealth screening software. If possible, consider appointing a team member to work with major donor leads.
1.1.2 Regular donors
Regular donors usually give more frequently but their gifts are smaller in size. They often make up the majority of the donor base and can be quite diverse in age, socio-economic background, and interests. This is why it’s crucial to collect and analyze data about your donor base. To cultivate regular donors, you will likely have to employ a multitude of donor acquisition and donor retention techniques.
Regular donors are either “one-off” donors or recurring donors. Many nonprofit experts recommend that you get regular donors to become recurring donors. This provides your nonprofit with sustained income and therefore allows you to better plan your activities.
1.1.3 Fee for service
Many nonprofits, depending on what they’re offering, simply must charge at least a sliding scale fee to cover either the services or goods they are providing. Examples include certain hospitals or public health clinics. You may also consider a sliding scale of prices based on the recipient’s income.
Consider if this is a possibility for your nonprofit, but do your research and keep your beneficiaries in mind: Will they be willing to pay the price you’ve set?
This funding source works particularly well for organizations such as universities and hospitals that serve a large community with a high turnover. If your nonprofit organization serves a large group of people that pass through and benefit from it frequently and consistently, it might be that they would like to give back and help others receive the same benefits or assistance that they did.
According to the nonprofits source, approximately 63 million Americans — 25% of the adult population — volunteer their time, talents, and energy to making a difference. The value of all those hours was approximately $193 billion.
While “volunteer hours” aren’t technically a funding stream, your organization might want to view it as one. For example, volunteer hours can reduce the amount of funding you’ll need to raise for a particular program/service.
1.1.6 Planned giving
Planned giving is known by many names: bequest giving, gift planning, deferred giving, legacy giving, and estate planning. They all refer to someone leaving something to your nonprofit organization in their will. These donations tend to be larger and therefore the time and effort to establish the connection and commitment needs to start well before the individual’s end of life.
With the right strategy and efforts in place, this can grow to become a significant piece of your fundraising pie.
1.2 Online or Offline Donations
You can receive individual donations online or offline. While online fundraising grows day-by-day, and more individuals seek information online, don’t be quick to dismiss traditional fundraising.
The best results are usually seen when you combine both traditional and modern fundraising techniques.
1.2.1 Online fundraising
When you’re not running a specific campaign (and even when you are), your website is your best bet. It’s the permanent home to your online fundraising efforts. It’s crucial to invest time and effort to make your website and online donation page shine. Make sure that the potential donor encounters a user-friendly website and has a smooth experience. Don’t hide your donation button! A donor should be able to find your donation link within a couple of seconds of your donation page loading.
Read more about how to design a great donation page here.
In simplest terms, crowdfunding is all about many individuals each making a small donation – $10, $50, $100, maybe more. Crowdfunding has become popular with the proliferation of various online platforms for fundraising and is used both by corporate organizations and nonprofits.
There are many different types of crowdfunding, but the one most used by nonprofits is donation-based crowdfunding. To get the most out of donation-based crowdfunding, post regular updates, share via e-mail, and on social media. Make sure to tell a story – a story is what fuels a crowdfunding campaign.
Crowdfunding often helps get your nonprofit known to potential donors that otherwise wouldn’t have known about your organization.
Crowdfunding appeals can be time-consuming when done properly. Although the setup is free, crowdfunding sites charge fees for the privilege of collecting donations through their site. Finally, due to its growth, crowdfunding is a saturated market.
Peer-to-peer fundraising is a sub-category of crowdfunding. Instead of having one crowdfunding page where everyone donates, with peer-to-peer fundraising, individual fundraisers usually set up personal fundraising pages to accept donations, which are then received by your nonprofit.
This strategy encourages supporters to reach out to their peers, friends, coworkers, and family members for donations.
Peer-to-peer fundraising is effective because it builds on relationships, uses your already-existing donor base. Peer-to-peer fundraising also works well because it’s exponential. All the individual campaigns by your supporters ripple outwards and bring in more donors.
One of the major drawbacks of peer-to-peer fundraising is the effort it takes to train fundraisers. It can also be challenging to clearly articulate and transmit your nonprofit’s mission, vision, and values to dozens of individuals well enough so that they can continue sharing it in the same way.
Study after study puts email marketing as the most effective way for nonprofits to build awareness, acquire leads, raise funds, and retain current donors.
E-mail marketing services are generally free for smaller nonprofits. And even when the email list grows in size, e-mail marketing remains very cost-effective. Furthermore, e-mail marketing tools have become so intuitive – with professionally designed templates, drag and drop features, and other easy-to-use editors. Compared to other types of fundraising, e-mail marketing acquires customers, supporters, donors, and volunteers faster. E-mails are also easily customized/personalized.
On the other side, we are swamped with dozens of emails every day, including fundraising and advocacy emails. Therefore, even though the number of subscribers is growing, the engagement rates are dropping. This means organizations need to become increasingly skilled at capturing their readers’ attention.
One advantage of the move to online giving has been the facilitation of painless recurring giving programs.
Monthly giving (otherwise known as recurring giving) reigns supreme. Although big donations are valuable and should still be pursued, recurring giving programs provide a reliable source of income for your nonprofit. That’s why developing a great monthly giving program is a great investment that can have a tremendous impact on the long-term financial health of your organization.
When a donor sets up a recurring donation, they choose to give a pre-determined amount of money on a regular basis. Many people like to give monthly, bi-monthly, or yearly, but they can give as frequently as they’d like. Monthly giving is probably the most frequent form of recurring giving.
Pro Tip: Research & Analyze some of the top donation tools for nonprofits & choose a donation software that has features such as monthly giving, Crowdfunding, Text-to-Give, online donation forms, etc.
1.2.2 Offline fundraising
This offline fundraising method is still used by nonprofits since it’s still effective for certain donor segments. It’s particularly useful for smaller nonprofits or nonprofits that operate locally. Additionally, older donors are more likely to prefer direct mail. If your nonprofit has an older donor pool, you could find direct mail highly effective.
Direct mail gives you a chance to provide in-depth information to your donors – that can’t be conveyed in a text, Tweet, Facebook ad, or even an email.
However, direct mail can be pricey, especially when compared to e-mail marketing, for example. Direct mail also takes time – you have to write the letters, hone the list, track responses, remove people from your list, keep the addresses up to date, and more.
Postal mail also doesn’t pack quite the same punch as it once did, with many donors tossing their mail aside after a cursory glance. To capture attention, you need to stand out; and to stand out – you need to pay money (e.g. for a graphic designer to design a compelling postcard).
Fundraising through events has become increasingly popular in the nonprofit community. Whether a nonprofit is hosting a walk-a-thon, gala dinner, art exhibition, concert, or field day, or a hike-a-thon, events provide an avenue by which donors and potential donors can interact in person and learn more about the organization.
Donors are more likely to give if they can put names to faces. Since events are generally perceived as fun, they usually attract a large number of people. Events also help raise an organization’s visibility and brand. They help build up the mailing list and can boost online fundraising too.
Events help build camaraderie among the constituency, help organizations meet and dazzle new prospective donors, as well as deepen their relationships with key donors.
However, events are usually labor-intensive and require a lot of detailed planning. An event can also be ruined because of the weather, a competing event on the same day, a guest not showing up, and many other details over which you have little control.
Although door-to-door fundraising has diminished over the years due to its resource-intensive nature, it’s still utilized successfully by many organizations, especially political organizations.
Door-to-door solicitation, in general, works best for campaigns or programs that directly affect the people being approached. It can be targeted in terms of audience, which reduces donor attrition. Door-to-door canvassing enables a one-on-one, face-to-face interaction with potential donors/constituents that is unattainable through direct mail, e-mail, and the Internet.
However, door-to-door canvassing is one of the top reasons people have a poor impression of nonprofits. Some donors cite door-to-door solicitation as intrusive. A full-time, door-to-door canvassing operation is also quite labor-intensive and requires very enthusiastic and educated volunteers (which can be hard to achieve).
Phone solicitations are donation requests made over the phone, ranging from one employee making a couple of ‘thank you’ calls to large telemarketing campaigns. Like door-to-door fundraising, this technique has diminished over the years as online fundraising grows, but it can still be effective for some nonprofits.
Phone calls are as personal as it gets. With phone solicitation, gifts are often large. It’s scalable, as the numbers can grow over time. Calling donors can increase a fundraiser’s current donor base and increase gifts, get lapsed donors back on board, improve retention, convert donors to monthly donors, and is the perfect way to welcome and say thanks plus generate feedback from donors.
However, phone calls are very labor-intensive. Some donors are also quite averse to phone solicitation. Therefore, if fundraisers using phone solicitation are not tactful and skilled, they can do more harm than good. Finally, not everyone who pledges money over the phone will actually deliver.
1.2.3. Special types of fundraising
A capital campaign is a time-limited effort by a nonprofit organization to raise significant dollars for a particular project, such as funding a new building or raising funds for a (very big) specific project.
Capital campaigns have a beginning and an end but often span several years. A capital campaign employs all the usual means of raising funds such as direct mail and direct solicitation. Capital campaigns require extensive preparation and skillful execution.
Text donations are donations that donors can make via their mobile phones. Usually, donors text a keyword and/or an amount to a dedicated number. They are then usually sent the link to the organization’s mobile-responsive donation page. Once a donor fills out their info on this form, they never have to fill it in again. There are also text-to-give platforms that don’t require filling in a form (where donors can confirm the donation by simply texting back “yes”).
Text-to-give is easy and convenient. Donations by text are somewhat like impulse purchases; which means that nonprofits don’t have to capture donors’ attention for very long.
However, software, licensing, and transaction fees can potentially add up to 5-10% of the total donations received. Additionally, there’s often a cap on all donations; some providers will only process donations as low as $5 and as high as $10.
And finally, there’s no system for capturing donor data to help you keep building on the relationships initiated through text-to-give.
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:
- 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.
- 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.
- 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.
Here’s a detailed guide on How to Find Grants for your Nonprofit.
If you’re based in the United States, the US government has a searchable online database of government grants to help you find what you need. Foundation Center is particularly useful for its extensive directory and free resources.
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.
Corporate support comes in many forms:
- Philanthropic – no-strings-attached donation, similar to individual giving
- Event sponsorship – episodic or short-term support, typically event-based
- Cause marketing – longer-term thematic engagement
- Pro bono – corporate professionals offering their expertise/services
- Matching gifts – when corporations match donations made by their employees
- Paid release – when companies employees a few paid release days each year, allowing an employee or many employees to spend a day or two volunteering during regular work hours
- In-kind gifts – when companies give product donations rather than cash contributions
- Check-out campaigns – consumers give at the cash register when checking out
Essentially, through the many different forms of corporate sponsorship, your nonprofit can raise money, gain in-kind donations and gifts such as furniture, office equipment, marketing advice, consulting services, or website development support, to name a few. In exchange for their sponsorship, your nonprofit can put their logo on your website, display their logo at your events through banners or on t-shirts, or give them an honorable mention on your blog and social media platforms.
When considering corporate sponsorships as one of the funding sources for your nonprofit, don’t forget to consider the overhead costs – someone will need to manage the partnerships, especially if you’re thinking of making corporate partnerships one of your main sources of income.
Pro tip 1: Your board can be an excellent source of business contacts. Ask your board members to introduce you to potential sponsors.
Pro tip 2: It’s great to think big and reach out to large corporations. But don’t forget about small businesses too, especially if your nonprofit is smaller or locally based.
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.
- Membership programs provide a constant source of revenue for your organization.
- This funding source is immediate and unrestricted.
- Memberships give people a way to have an intimate, ongoing relationship with your organization.
- Managing a nonprofit membership program takes time and effort. Members often expect special treatment.
- Offering benefits and perks can become expensive. All those mailings, t-shirts, and mugs can add up.
A sub-category of the membership model is funding through past beneficiaries or alumni. This model works particularly well for hospitals and universities, who incite a sense of ‘giving back’ in their past beneficiaries.
This particular ‘past beneficiaries’ funding source, therefore, works if your organization serves a large community with a high turnover. In this regard, Princeton University is a stellar example.
The university has become very adept at tapping alumni for donations, boasting the highest alumni-giving rate among national universities—59.2 percent. In 2008, more than 33,000 undergraduate alumni donated $43.6 million to their alma mater. As a result of the school’s fundraising prowess, more than 50 percent of Princeton’s operating budget is paid for by donations and earnings from its endowment. (Bridgespan – Barbara Christiansen, Peter Kim, William Foster)
This works because Princeton University’s past beneficiaries feel like they’ve received great value from the institution in the past, and are keen to help others receive the same benefits. Past beneficiaries see the individual benefit they received in the past as serving the higher social good.
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.
Selling goods and services is sometimes also called ‘trading’ or ‘earned income’.
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.
While opinion varies as to what is the “ideal” nonprofit funding model, utilizing several diverse funding sources to achieve sustainability is generally a good practice.
It’s advisable for nonprofits to never receive more than 30 percent of their funding from any one source. If an organization loses 30 percent of its revenue, it could probably restructure in order to survive.
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 organization, 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!