How Does Your Non-Profit Handle Restricted Funds or Unrestricted Funds?

What Your Nonprofit Needs to Know About Unrestricted vs. Restricted Gifts

Providing donors with more options about how to give—either unrestricted or restricted gifts—can both encourage your top donors to give more and attract new support to your cause.

If you are like most nonprofits or charities, you don’t think much about what kind of money your organization needs but rather the money itself. You know you need $1.5 million to purchase a property. You know you need $550,000 next year to pay your staff salaries. And you know you need $200,000 to expand a flagship program to another group of kids in need in your community.

All of these categories represent different kinds of money—and can be asked for in different ways in order to increase your fundraising overall. Here is what you need to know about unrestricted vs. restricted funding.

Unrestricted and Restricted Gifts Defined

Unrestricted gifts mean that the donor does not designate how, where, when, and why you as an organization can use the funding, but gives you free reign to apply it to any costs you have in your budget. These gifts can go toward your “general operating” support (for staff salaries, administration, fundraising costs, etc.) or to any project costs or capital needs you have. They are the most flexible and wonderful gifts that you can receive, because they help you fill in gaps in your budget to support your mission as you see fit.

Restricted gifts, on the other hand, mean that the donor specifically designates their gift to a particular project, purpose, capital need, or fund. The donor might impose a clock—temporarily restricting the funds to a particular project or stating that the gift needs to be used within a certain time frame (as in the next fiscal year)—or restrict them permanently to be set aside and only used for a particular purpose.

What Are the Benefits of Asking for a Restricted Gift?

The most important question you have to ask, when deciding to restrict gifts, is what does your set of donors care about and how do they like to give? The Chronicle of Philanthropy found that the more affluent the donor, the more they prefer restricted gifts. So, if you are looking for large gifts or are asking your best or new major donors to be involved, you might think about asking them to pay for that $1.5 million property (a restricted capital gift) in the example above.  They might be much more likely to give you a large sum for a specific purpose rather than for general support.

Also, consider if your particular set of donors is more or less interested in particular projects you operate. Your donor might be more prone to give you a restricted gift for your $200,000 project expansion (if the project is something they care about) than a general, unrestricted gift that helps you pay your staff.

What Are the Disadvantages of Asking for a Restricted Gift?

The worst disadvantage can be legal ramifications. If a donor restricts a gift in the giving instrument (the letter or communication that came with the check and told you how they want the gift used) and you fail to use it specifically for that purpose, you not only will alienate your donor for all time, but you can be sued. An Oklahoma hospital that failed to use a restricted gift from Garth Brooks to build a designated hospital extension was forced to not only give him his $500,000 back, but to pay him that same sum on top of it in punitive damages.

Another disadvantage is tying up the money and increasing your financial administration burden. If you accept restricted gifts, you have to set up restricted endowments or separate bank accounts to house the funding until you use it. While you might want that $1.5 million property, it might take you 3 years to raise all of the funding and you have to manage all of those donations in a separate account during that time. Your priorities might even change during that time period!

How to Decide on Asking for Unrestricted vs. Restricted

The best move is to ask for either! Empowering donors to feel like they have the control over their funding is always a good way to cultivate stronger relationships. Give the donor the option to either support your general operating funds, or to support particular projects or capital needs. You can even ask them to split their gift between the two—ask for $1,500 for your property purchase and $500 for unrestricted funding to help you pay for staff and program expansions in the coming year. This way, you might be able to squeak out a larger gift from your donors (or attract new ones that are engaged in a particular cause).

It also comes down to what you really need as an organization. Do you need that property, or is it more critical that you focus fundraising on your basic operations and core programs? Be honest with your goals and capacity. Though asking for those capital projects could bring in new donors, in the end, you are responsible to manage all of those funds and fulfill all of your promises.