Nonprofit organizations (NPOs), like the name, suggests, do not make any money from their operations, products, and services. Regardless, the organizations still need income to keep them afloat and operational. Therefore, they depend on the government, other corporations, and individuals, among other financing sources. Funding models come in handy for these organizations. In this post, we look at these models in depth;
What are Nonprofit Funding Models?
These models focus on funding, and not the programs or services provided by an NPO to its beneficiaries. They take advantage of the natural matches that exist between the funder’s mission and the beneficiaries of the organizations. The models are useful to organizations because they help them advance and progress their fundraising and administration strategies. They are applicable to organizations once they get bigger. Examples of funding or business models include:
- Public Provider and Innovator
- Local Nationalizer
- Member Motivator
Who Would Benefit from a Funding Model?
A funding model is suitable for prominent institutions with revenue of three million dollars or more. On the other hand, small organizations would benefit more from diverse funding until they could start using such models. Small NPOs that use the self-funding business model also do not require these models.
How to Choose a Funding Model?
There are several funding models in existence. When choosing the best one, the following tips would come in handy:
Assessing and Planning
The first thing you need to do is assess your NPO. In this process, you can decide your establishment’s needs and which funding model would suit it best. Once you have analyzed all aspects of your NPO, you can come up with a plan. For instance, plan how you intend to materialize the funding model and what you will do with the funds. Planning will help you go into the process with a clear goal and perspective.
Analyze Other Organizations
There are many NPOs in existence. All of them utilize at least one or more funding models. It would help if you analyzed similar institutions in your area or focus. Determine which model they use, how they are faring, and what you can take from them. Doing this will also help you determine the mistakes they have made, what they cost them, and what you can do to avoid making similar mistakes.
Think Long Term
If you want your institution to be durable, you need to think long term when it comes to financing. The last thing you want is to have to shut down operations due to a lack of resources and finances. Therefore, when making a plan, make sure you are planning for the long term. Analyze the resources that your establishment requires to stay active for a long time, then develop a plan on how you will achieve this.
Nonprofit Funding Model Essentials
Below are some essential aspects that these NPOs should consider when seeking financial assistance or funding from external parties:
A diversified funding model is one that is that is broadly diversified across multiple sectors and sometimes geographical regions. It is where NPOs gather financing from more than one source. Diversified funding helps to create revenue stability and prevent overdependence on one source of funding. Since these NPOs depend on external funding mostly to conduct their operations, they must have more than one source to stay afloat. Diversified financing also helps these establishments achieve their goals faster and more efficiently.
Fundraising for NPOs is very unpredictable. The easiest way to have constant financing is by getting multiple-year contracts. These contracts come in handy in cases where the organizations experience a surge in their donor activities. Multiple-year contracts also allow them to seek other sources of financing when the contracts are terminated. During the agreements’ life, the NPOs can also get a lot done towards achieving or fulfiling their mission. It is easier to get multiple-year contracts from government agencies.
NPOs also need flexible funding if at all, they are to maintain their operations in adverse conditions. For instance, the covid-19 pandemic has made it hard for these organizations to host events life fundraisers to get their funding. This means that if an institution was solely depending on fundraising as a financing source, it will run to the ground or go bankrupt. NPOs with flexible funding benefit during such times because they have alternative sources of financing.
Unrestricted funds are donations that the establishments can use for any purpose. Unrestricted funds are beneficial to both large and small nonprofits because they allocate the money to whichever entity needs it most. These types of funding models usually go towards the operating expenses of the organization or to a particular project. They can even be allocated to the future needs of an entity. Unrestricted funds can be donated by individuals, corporations, and sometimes the government. However, it is on rare occasions that the government provides unrestricted funds.
Main Nonprofit Funding Sources
There are several ways through which these entities can get startup financing and general operation contributions. They include:
Selling Products or Services
Many small nonprofits get their financing from selling products. Large institutions can also get funding from selling merchandise like t-shirts with their LOGO, among other products. Some non-profits get a certain percentage of their revenue from fees charged for services. For instance, an entity can offer cleaning services so that they can raise money to cater for their costs of operation. According to professionals, these funding models are commonly used for startup financing for organizations with a self-funding business model.
Corporate funding, sometimes known as corporate philanthropy business model financing, is also a popular source of funding for these establishments. This is especially the case for new entities seeking startup financing. However, most corporations prefer to give their money to organizations that have grown significantly. Corporations usually make donations to institutions whose primary focus resonates with the company or its leaders. The funding can also be given as part of Corporate Social Responsibility.
The government offers grants and financial aid to a wide range of small nonprofits annually. Most of these NPOs compete to get government grants. The government has a list of requirements that the organizations have to fulfil to become eligible for the grants. These grants are also usually limited to a particular state, locality, or district, depending on the type. Government grants can fund both the operative and administrative costs of an establishment. The way the funds are used is usually part of the conditions provided. This is an excellent way for the entities to get startup financing. Both large and small nonprofits can profit from grants.
Many small nonprofits get funding from individual donations. These funding models are common with small nonprofits. The individuals can either be members or well-wishers of the NPO. Individual donors can make one-time or constant donations depending on their financial level and agreement, or their affiliation with the entity. They can also make their donations in a wide range of ways like through online or offline sources, planned giving, and during events. Individual donors are a useful source of funding for many entities, making up more than 71% of all donations. Most NPOs use individual contributions as their startup financing.
Institutions like the RedCross use membership subscriptions as their funding models. The institutions require their members to pay a specified amount of money. The members have to renew their membership after a stipulated amount of time to maintain their membership status. Failure to do so affects their membership status. For such institutions, a significant percentage of their annual revenue comes from membership subscriptions and new members’ registration. Small nonprofits can also use these funding models.
Ten Nonprofit Funding Models
There are ten primary funding models that different NPOs can use. Below is a description of each of the funding models:
These funding models are where entities rely on major grants from a few individuals or other foundations to fund their operations. Most of the time, the primary donor is the founder of the establishment, and they usually want to focus on a deeply personal issue. The founders start the entity with adequate financial backing, which allows them to grow faster. Sometimes, the organizations get financial backing from an existing institution which wants to invest in an approach to solve a problem. The factor that attracts donors to these establishments is mainly centred on the focus issue. NPOs that fall into this category often focus on areas like medical research or environmental issues.
This type of funding applies to organizations that provide services that straddle an altruistic donor and pay. The funding is also motivated by forces of the market. NPOs that focus on organ donations fall in this category. What happens is that there is a high demand for human organs. However, it is illegal for any company to sell them. This means that there are legal and moral reasons why it would be fitting for a nonprofit organization to provide these services and products. Therefore, these entitites acquire their revenues from fees and donations linked directly to their activities. The NPOs typically have a group of founders who have a monetary interest in backing the cause.
NPOs that depend on these funding models mostly work with government agencies. They provide essential social services like housing, education, and human services. The organizations have to focus on an area that has been previously defined by the government and allocated funding. Sometimes, the government will outsource service delivery functions and develop particular requirements that define which establishment will be eligible for funding. Most of the time, multiple entities have to compete for this type of funding. An establishment has to demonstrate its ability to do better than its competitors to get the funding. In simpler terms, the public provider model of funding is where the government is the primary donor.
Organizations that use these funding models typically rely on government money. These NPOs have created a unique method of addressing social issues that other existing government funding programs cannot compete with. They are tasked with the role of convincing government funders to support alternate methods. Therefore, they use less expensive and more effective methods compared to other existing programs. In other words, institutions that are considering these types of funding models deliver an pioneering approach that goes beyond the norm in terms of cost and impact, and it is attractive to government funders. Such institutions also have to present evidence to the funders that their program is effective.
NPOs that create a countrywide system of local operations use this funding models. NPOs in this category mainly focus on areas like poor schools, the need for adult role models for children, and other essential areas for local communities in different parts of the country. Most of the time, they focus on areas where the government cannot solve the issue without assistance from other establishments. The money used to fund these programs is raised locally through individual and corporate donations. Special events are also often used to raise funds. It is also worth noting that these institutions rarely get any significant level of funding from government agencies.
Some institutions significantly depend on individual donations from members. The individual members donate money because they relate to the issues and causes on which the organization focuses. They also donate so that they can achieve a collective benefit with the organization. Entities that use the Member Motivation funding models do not have to create a rationale for group activity. Instead, such organizations connect with individuals who are members by coming up with or supporting certain activities.
Religious, environmental, arts, culture, and humanities entities typically fall in this category. They also use funding models like annual memberships and merchandise purchases to get funding. Depending on the financial levels of the members, establishments that use these funding models can raise a lot of money.
Some NPOs compete with each other to provide government-backed services to their beneficiaries. These establishments utilize the Beneficiary Broker (BB) funding model. They usually focus on areas like housing, employment, medicine, and student loans. The main difference between these establishments and other programs that are funded by the government is that the recipients here are free to select the organization from which they wish to acquire services. These NPOs have to demonstrate their superior capacity to link benefits to the government. They also have to develop a secondary service that can maximize value. Mastery of the government’s regulations and requirements is mandatory if an institution is looking to get this kind of funding.
Some institutions are reimbursed for the services they provide to a particular group of individuals. These ones depend on former beneficiaries of their services for more donations. They use this funding model. For instance, universities and hospitals can get funding from students and patients. In simpler words, this type of funding comes from the fees that beneficiaries pay to receive the particular organization’s services. Institutions looking to get this type of funding strive to build a long-term relationship with their beneficiaries to get supplemental support. While the donations are usually minimal, they are vital because they are a significant income source, especially for projects such as research and funding endorsements.
This funding models are applied by organizations that grow through collecting in-kind contributions from companies and individuals. The NPOs distribute their contributed goods to deprived recipients who cannot afford to purchase the products directly from the market. Corporations are usually willing to contribute goods to such establishments because not doing so would mean them going to waste. Most of the time, these products are not going to be distributed in the market either way. While these products provide significant funding to some institutions, such bodies still have to raise extra capital to sustain their operations.
These funding models apply to organizations that focus on causes that resound with the prevailing concerns of a hefty sum of people. These people typically fall in all income levels. These entities create a way through which people can connect with the concern and make a change. Establishments that use this funding models usually focus on causes in environmental, global, and medicinal research. Heartfelt connectors typically try to build connections between volunteers by hosting special events like fundraisers. NPOs can consider this funding model if they have a broad cross-section of people interested in their cause. Having a natural avenue that can attract large numbers of volunteers also helps.
Have you Found a Model that Fits your Nonprofit Organization?
If you are looking to find a funding model that suits your establishment, the first thing you need to do is understand the different types of models. From there, you have to ask yourself questions that will help you figure out which one of the funding models suits you best. For instance, if your cause addresses an matter that resident leaders would consider a top priority, then the Local Nationalizer funding model would be the best choice for you. On the other hand, if your cause is donating products to a disadvantaged group and you are likely to get donations on an ongoing basis, then Resource Recycler funding model would be an ideal option.