Bringing in money from significant contributors like foundations is vital for many nonprofits. It helps keep the lights on and achieve the organization’s goals with large chunks of cash rather than forcing them to chase down many small donors.
Donations are often the most significant part of this quest – but they’re not the only part. Loans from foundations can also play a critical role. However receiving funds in these two ways can mean significant differences from a financial, legal, and operational standpoint. Let’s take a closer look.
Understanding Donations and Loans and Their Impact on Nonprofits
It’s important to be clear about what we’re discussing before considering the benefits and drawbacks.
Donations refer to any financial gift that isn’t expected to be paid back at any point. They typically offer some flexibility in terms of how they’re spent, except for restricted donations set aside for certain programs or uses.
On the other hand, loans must be paid back over a defined schedule agreed to by both sides and may include interest in some cases. They’re generally provided for more specific purposes, particularly those that can generate revenue to repay the loan.
Legalities of Donations and Loans
Keeping on the right side of the law is a must for any nonprofit, and donations and loans have varying requirements on this front. Nonprofits receiving contributions must be registered with the appropriate status, usually as a 501(c)(3). In some cases, there may also be state or local registration requirements.
Organizations must also maintain specific records and fulfill financial reporting requirements related to donations and taxes. Nonprofits receiving loans typically need board approval for the transaction and may be required to secure the loan with assets like organization-owned real estate. The cost of this financing should also be clearly documented in the nonprofit’s financial reports.
Meanwhile, foundations have legal responsibilities of their own when giving funds to nonprofits, whether in the form of donations or loans. They should ensure any organization they’re working with is registered correctly in order to preserve the tax benefits of their gift. Foundations likely also have their financial reporting obligations that will have to be met for any donations of loans.
Advantages and Disadvantages of Nonprofit Donations
Like any funding source, donations have both their upsides and their downsides for each side of the transaction. Here are the most critical.
Benefits of Donations From Foundations
One of the most significant benefits foundations enjoy when they provide donations is tax deductibility. Money provided to qualified charities can help offset other tax liabilities, doing good while saving money at the same time.
Nonprofits prefer gifts because they add tangible assets to the organization that doesn’t need to be paid back and can often be used flexibly. For both sides, donations and grants also provide the advantage of simplicity, with easier management of the gift on both sides.
Drawbacks of Donations From Foundations
Providing donations can require more upfront work from foundation staff, who need to ensure that the nonprofits they give funds to are properly registered and good stewards of the cash. Without this, funds can be used inefficiently, reducing the foundation’s overall impact.
Charities must also deal with strict and clearly defined reporting requirements for grants and large donations.
Advantages and Disadvantages of Loans
Foundations that offer loans and nonprofits that accept them also have several critical things to consider on both sides of the issue.
Benefits of Loans from Foundations
Loans also offer the benefit of allowing the foundation to use the same cash to later help other charities or causes once it’s repaid from the original recipient, potentially multiplying their impact in significant ways.
Drawbacks of Loans from Foundations
For nonprofits, loans typically come with more strings attached, requiring nonprofits to use the funds for specific purposes. Loans also can’t offer the same financial benefits to nonprofits since they must keep them on their books as a liability.
They’ll also need to dedicate administrative time to monitoring and paying off their loans, in addition to the financial cost of any interest payments that could otherwise go toward the nonprofit’s mission. Foundations will also need to spend this time, as loans are more complex legal documents than donations or grants.
Evaluating the Effectiveness of Donations and Loans
Improving your impact means tracking your results, whether you’re a foundation giving donations and loans or a nonprofit receiving them. Foundations should track the effects of their giving, especially for restricted donations with a specific purpose. This can allow them to look across their entire portfolio of giving to find the most effective partners.
Nonprofits likewise should keep track of their largest donors and consider the organizational and mission impact of any requirements.
Donation vs. Loan: Still Need Help Understanding?
Both methods of funding from a foundation have their pros and cons. However, the best and most savvy charities and nonprofits keep both in mind when plotting out their financial strategy and carefully consider which might work best for their current circumstances and future goals.
For those who need a little help in these crucial decisions, The Charity CFO is here. Our experienced financial professionals can help break down the details and allow you to move forward with confidence as we back your organization up with all legal and regulatory requirements.
Contact us today to learn how we can transform the way you fund your organization!