Donating for Impact? Don’t Restrict Your Dollars

Back Commentary Sep 11, 2017 By Bree Cahill

Leaders working in the nonprofit sector are some of the most passionate and dedicated folks you will ever meet. Many, especially those who founded their own nonprofits, felt called to make a difference in what they see as a solvable problem within our society. Whatever the problem, they had a spark of inspiration about the solutions, an innovative plan to feed that spark, and the drive and motivation to pull together the volunteers, resources and funders necessary to make their dream for our communities a reality.

So why is it that many funders — particularly funders offering mid- to large-sized grants — indicate a lack of trust for the skills and budgeting ability of these incredible entrepreneurs by restricting funds to particular buckets within their organizational budget? Funders may tell you that restricted funding increases nonprofit transparency, but what exactly are funders so afraid nonprofit leaders will do if given the flexibility and implied trust that comes with unrestricted funding?

As a donor, if you believe in the mission of the organizations you support and in the leadership team that nonprofit has assembled to make lasting change, fully invest in the cause by trusting then to make the right decisions with your dollars.

Let’s back up. What exactly am I talking about? When you donate to a nonprofit, you are either offering restricted or unrestricted funds. Restricted dollars are tied to a specific purpose, meaning a donor funding a nonprofit reading program could restrict all of their dollars to purchasing books. But what if the nonprofit had hundreds of books donated the quarter you made your restricted donation and instead wanted to use the money to pay a new tutor to serve an additional 10 children? Well, too bad.

Granted, not all restricted funding situations are so black and white. Some funders are open to redistributing a restricted donation through an open dialogue with the nonprofit. And sometimes restricting dollars makes sense for a particular donor. (Say, when a donor believes in a particular program a nonprofit runs, but their theory of change does not match the mission of the nonprofit’s sum total work). But restricted dollars can also significantly limit nonprofit flexibility in making decisions about how the biggest overall impact can be made.

Unrestricted dollars — far more rare in the nonprofit world — are not tied to a specific purpose. This means the organization may use the dollars as they see fit. So, in the same example used above, the nonprofit could decide to use the funding to hire that new tutor because that is the need they have determined to be most pressing.

One common form of restricting funding is when funders indicate that only a certain percentage (typically below 20) be spent on overhead. Encouragingly, over the past few years, more influential voices in the philanthropic space have been speaking about the impact-limiting systems of both restricted funding and the emphasis on low overhead cost. Certainly, when you invest in (or donate to) an organization, you want to make sure it spends its money wisely.

But what is more important: percentage of dollars used on overhead or overall impact? By restricting overhead costs to a small percentage of dollars donated, a donor may be unintentionally limiting the power of their donation. Items like strategy development, staff salaries and training are often considered overhead costs. Do funders really want to limit funding of these important line items?

Ironically, grantmakers who fund through restricted dollars often do so because they believe restricted funding leads to more transparency. On the surface, that makes sense: Restricted dollars go toward specific items, are trackable and often come with reporting requirements on their ultimate use. But restricted dollars signal a huge roadblock in the way of a transparent relationship — lack of trust.

Many funders — particularly those of scale — have skills and knowledge that could serve as the basis for a valuable partnership with nonprofits. But, without a foundation of trust, a transparent partnership focused on outcomes is all but impossible to form and maintain. When funders restrict dollars, they do the opposite of what they are trying to do, highlighting the inequality in the funder/fundee relationship and eliminating the possibility of true transparency around a nonprofit’s needs.

Trust begins with a change in the typical funding model. Certainly, vet the nonprofits you plan to fund. But once you believe in the team and have seen the data to support their work, underscore your belief and trust by releasing the restrictions on your dollars.  

Over the last few years, there has been a trend toward discussing the often destructive, inefficient nature of restricted funding. But many funders still hang their hat on the need for “transparency,” missing the point that restricted funding decreases trust and efficiency by its very nature. When nonprofit leaders are forced to spend their time determining where every single one of your donated dollars went and making sure they haven’t spent too much on those completely unnecessary (eye roll) overhead costs, they’re taken away from what they do best, which is making an impact.

As a donor, if you believe in the mission of the organizations you support and in the leadership team that nonprofit has assembled to make lasting change, fully invest in the cause by trusting them to make the right decisions with your dollars. Trust that they will use those dollars to build capacity and, ultimately, make progress toward solving the social problem they are addressing.

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