Why Grants Are Not the Answer to Your Nonprofit Financial Problems

Grants Have Their Place, but Are Not a Cure-All

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Too often nonprofits think that grants are the Holy Grail. They may believe grants will help a nonprofit get started, save it from going under, or meet next month’s bills.

That’s because there is a considerable misunderstanding about how nonprofits fund themselves and the role that foundation grants play in that funding.

Here are some of the realities about foundation grants that your nonprofit needs to understand so that you can put them in perspective. Make sure that you develop a well-balanced basket of revenue streams that will sustain your organization for the years ahead.

1. Grants Will Not Help You Start Your Nonprofit.

Primarily foundations give grants to established 501c3 organizations. Foundation grants are not where you look for start-up funds for your startup or non-exempt charity.

Founders often use their own resources to get going and have private funders ready to help financially. Sometimes, a charity can get a bank loan, but there still must be some collateral, someone to guarantee the loan, and the business plan has to be exceptionally good with an excellent path to sustainability.

Fiscal sponsorship is another way some new charities start. A charity or a charitable project that is not yet a 501(c) (3) can receive a grant through its fiscal sponsor.

But in general, don’t count on grants until your organization is well established and looks like it is going to be able to sustain itself. When will you be ready? See Is Your Nonprofit Ready to Apply for Foundation Grants? Small nonprofits or those early in their development should find local foundations to see if they would be more willing to help with a local cause.

2. Foundation Grants Rarely Fund Operating Costs.

It is rare for a foundation to provide money to keep your organization’s doors open. Grants are usually intended to fill what Janet Levine and Bo Martin, in Getting Grants Step by Step, call “gap reduction.” Grants work well to help create a new program or grow an existing one. But they are not meant to sustain an organization or even a particular program. 

While some operating expenses can be prorated and included in the funding for a specific project, foundations do not often provide money just for keeping the lights on.

Grant applications always ask what your plans are for sustaining your project for the long term. Grants are meant to be short-term infusions of money to achieve a particular purpose. It helps if your nonprofit has already raised some of the funds for the project or has found additional grantors or partners to help.

3. Foundation Grants Are a Very Small Part of Any Organization’s Finances.

How do nonprofits finance themselves?  

According to GivingUSA, in 2018 charitable giving was more than $400 billion. However, giving by foundations was just 16 percent of that. Most of the rest came from individuals. Furthermore, all of that charitable giving does not even wholly support most nonprofits. Most nonprofits supplement their charitable income through earned income, and in some cases, earned income outpaces charitable gifts.

For instance, universities charge tuition and hospitals charge for their services. A small therapeutic riding center for disabled children charges for its sessions, and contracts with local schools. The local YMCA charges membership dues. The Girl Scouts sell cookies.

Just like any business, nonprofits have to come up with most of their funding on their own. Self-generated income, not grants, is the foundation of a successful nonprofit’s finances.

4. Grants Take a Long Time

You cannot expect to get a grant quickly or instantly. It takes time to find the appropriate foundation that is most likely to fund your project. It takes time to develop the proposal, and it may take even longer for it to be accepted or rejected. If a nonprofit is in financial trouble, going after grants is not going to help.

Also, grants have conditions and restrictions. They are meant to address a particular problem, and funds must be spent strictly on that project. There are reporting requirements and oversight. Sometimes, foundation grants require the nonprofit to find additional money to match the grant before it is awarded.

Procuring a grant takes time and resources. Charities that are the most successful in getting grants have ongoing grants programs where someone is always looking for grant opportunities, and there is a dedicated staff to write, monitor, and report back to the foundations. 

Grants are “soft” money. That is, they can’t be counted on for sustained periods. That’s why most charities make sure they have other, more sustainable sources of income and don’t depend on grant money.

5. Foundation Grants Come in Limited Flavors

The most common types of grants are:

  • Project grants. These support specific programs or projects for a pre-determined period.
  • Capacity building grants. These help organizations increase their ability to do more in a particular area. For instance, a college might get a capacity building grant to help it develop its counseling and career services. A charity might receive one to help it build its fundraising capacity. These grants are for a process rather than a project.
  • Operating fund grants give ongoing support to an organization. They help with operating expenses. These are highly sought but hard to find. Small, family foundations are more likely to provide operating fund grants than larger, well-known foundations.
  • Research grants are typically found in academia and research-oriented nonprofits. In academic settings, they are often attached to a particular faculty member and go where he or she goes.
  • In-kind grants provide non-monetary help, such as equipment or even pro bono personnel. Corporations most often supply in-kind donations and grants.

6. Small Nonprofits Should Seek Grants Locally

While it’s not out of the question to receive a grant from a substantial, national foundation, small charities that serve a particular town, city, or state will often find the most success locally. 

There are thousands of small family foundations in every geographical area that might fund your project. They are not as easy to find as the large foundations, and you might have to work a little harder to locate someone to talk to. 

Family foundations, it was found in a 2009 survey, are much more willing to provide operating support for the charities they work with. Small family foundations usually have particular causes that they hold dear over an extended period and are more invested in their success. They are also not inundated with proposals and competing needs as large, well-known foundations often are.

Small foundations often have minimal interest areas. And many are not professionally staffed. You can usually find them through the contacts you already have on your board, among your volunteers, and even the people who use your services. Talking with other development professionals in your area may also turn up promising leads.

For more about how to approach small family foundations, see How to Make a Grant Proposal to a Small Family Foundation.

Grants indeed should be a part of any charity’s basket of income. But it’s important to keep perspective. It’s like the old food pyramid. Self-generated revenue is at the base, and the “gap” is filled in with various forms of charitable giving, including foundation grants, which occupy the upper levels of the pyramid.