Donor organizations can take several steps to ensure that the support they provide to beneficiaries, along with the associated policies and procedures, enables nonprofit organizations to carry out their missions effectively. Therefore, the goal should be, as Clara Miller described, who previously worked at a nonprofit funding agency, in: "Creating an institution capable of attracting reliable revenue and providing good programs in the long term."

Support providers can offer effective and contextual support by listening to donors and directly hearing from them about the types of support they need, particularly when they understand the unique financial picture of each nonprofit organization. Additionally, donors can support effective nonprofits by streamlining application processes, collaborating with other funders to pool resources, and exploring a full range of financial models.

The Role of Donors in Supporting Financial Sustainability

Nonprofit organizations that enjoy financial sustainability have sufficient revenue to meet the long-term operating needs of the programs that fulfill their mission.

This means, in practice, that the core activities of the organization attract or generate enough recurring revenue to cover ongoing operating expenses, and that they achieve the desired outcome; this also means that the organization has sufficient capital that exceeds current revenues and provides some flexibility to adapt over time, meet unexpected needs, and plan for the future.

Donors can use a diverse set of strategies and tools at their disposal to assist grant recipients in achieving financial sustainability.

Below are some considerations that decision-makers should invest in to build a strong organization through providing contextual and beneficial support:

1- Ask and listen to what donors say they need:

Many donors are not aware of the range of financial challenges faced by nonprofits and lack a full understanding of how our current practices support or do not support sustainability in the sector.

The GEO charity practices report for 2011 found that less than one-third of surveyed funders sought anonymous feedback from grantees, with another third gathering non-anonymous feedback.

Without listening to grantees, donors also do not know how to improve grants, even in order to meet the real daily needs that grantees require.

A more open and transparent relationship with donors will help us reach a more complete understanding of the core capital structures of the organizations, and the patterns of money that will help achieve the best aid. A study conducted in 2013 by the nonprofit funding agency found that 17% of grantees do not feel empowered to have an open dialogue with their funders about financial topics.

This means that the burden of complaint lies with the donors to raise the issue with beneficiaries, and when donors express a genuine interest in listening to beneficiaries to understand what they need, they build a foundation of trust that empowers beneficiaries to speak openly about their challenges and needs.

Donors seeking dialogue with beneficiaries about their financial sustainability should:

  • Take the time to listen to beneficiaries by engaging in respectful relationships and obtaining regular feedback.
  • Discuss the current funding model of the organization and the associated risks and opportunities it presents.
  • Understand how grants fit into the financial picture of the nonprofit organization, defining true operating costs and its periodic capital needs, and communicate better with them.
  • Provide types of support that are not needed by profit-seeking institutions, and to enhance sustainability, the most beneficial types of grants to recipients are large, multi-year, and unrestricted.

These grants provide recipients with the independence to cover the full cost of programs and operational expenses without excessive scrutiny from funders. In addition, enabling organizations to build the reserves they need and make strategic changes to their operations. Moreover, with an increase in the amount of grants and the provision of resources over a longer period, research conducted by the Center for Effective Philanthropy shows that general operating support grants have a more positive impact on organizations than programmatic grants.

However, if a donor is committed to providing programmatic support and other types of restricted funding, good practice includes covering full costs so that nonprofits are not hollowed out during the process of meeting grant requirements.

In order to understand true costs, donors need to engage with grantees in an open and honest conversation about their operations, from fundraising and personnel to technology and other infrastructure. Donors cannot know if we are providing a sufficient level of support to ensure the success of the programs and organizations we fund without a better understanding of these overhead costs and how they impact the nonprofit’s bottom line.

2- Reduce the burden on beneficiaries:

Every donor can take steps to make the grant application process easier for beneficiaries. The first step is to “right-size” application and reporting requirements to match the size and nature of the grant provided, aiming to reduce transaction costs that diminish the value of grants.

Grantmakers should minimally change our requirements during financial analysis based on the size and type of the grant and the nature of our relationships with grant seekers and donors. However, in its project of surveying grantmakers, Project Streamline found that 66% do not adjust requirements based on the size of the grant, 59% do not adjust based on the type of grant, and 72% overwhelmingly do not simplify the grant-making process that had previously been funded.

Project Streamline recommends a diverse set of basic steps that grantmakers can take to ease the application and reporting processes for grantees in order to increase relief on grantees. These suggestions include accepting electronic grant applications and reports, simplifying the application process to a brief inquiry letter submitted before the full proposal, and streamlining application procedures, such as extending timelines and making amendments to budgets that are almost always granted.

Other suggestions reduce the burden and effort placed on grantees, such as encouraging decision-makers to accept joint applications and materials already available to the grantee, checking the nonprofit’s organization status using Guidestar or IRS number 78, and paying for specific evaluation measures so the burden of evaluation function in the nonprofit does not fall on the grantee.

3- Work with other grantmakers to reduce routine resources and pool public resources:

Donors do not have to work alone to alleviate the burden of processes during application grants on nonprofits. In fact, in many cases, donors can have a greater impact by working together to streamline the process.

The world is filled with examples of donors coming together to provide a unified online tool for grantees to fill out as part of the application process to any participating funders. Along with common application and reporting processes, many donors are exploring how to pool resources more effectively. These efforts serve the dual purpose of simplifying the search for organizations (instead of applying separately to two or more funders, they can be done once) and providing larger and more impactful grants.

Researchers in the nonprofit sector see essential benefits in participating in joint funding with other funders, with the first benefit being attracting more money because people prefer to invest their funds in ventures that have already been vetted by others.

Secondly, joint funding creates efficiency in fundraising and reporting for grantees because participating funders align not only funds but also coordinate due diligence and reporting requirements.

4- Continue to explore alternative funding models:

Grants are not everything, as the appeals of grant-seekers to donors for different types of investments that meet their capital needs are increasing. For instance, debt as a form of capital does not represent an obvious option in the nonprofit sector, yet donors are increasingly exploring the use of loans to address cash flow challenges faced by nonprofit organizations.

There are various types of loan funders to donors, and this form of investment may include mortgages that offer more favorable terms than commercial lenders, pre-development financing for new projects, loans provided to community development banks, and other intermediate lending institutions.

Among the critical decisions that decision-makers interested in providing capital loans to non-profit organizations must make is whether they should provide direct loans or work through an intermediary. Some options available for program developers to consider include program-related investments, community development financial institutions, and low-profit limited liability companies.

5- Bridge the knowledge gap:

In addition to simplifying processes and providing nonprofits with the types of support they need to be effective, donors can also play an important role in ensuring that nonprofits have a better understanding of key financial issues and how to support organizations over time.

Providing capacity-building support, in addition to financial support, is one way that donors can invest in building stronger financial systems within nonprofits.

A study conducted in 2008 found that the Center for Effective Philanthropy that the majority of beneficiaries of a typical large foundation report do not receive any assistance beyond grants, such as strategic and financial planning, staff training, and management.

The CEP study indicates that this type of