What are the different types of funding?
There are many different types of funding, but they usually fall into three main categories:
- Restricted funds are to be used only for a specific purpose. This is the case, for example, when a foundation supports a particular project or you are awarded a government grant to provide a specified service in a specified community. Individuals may also place restrictions on their gift, such as designating it to purchase library books or computers.
- Unrestricted funds are available for use in any way that furthers the organization’s mission (or, to use a fancy tax term, its exempt purposes). It’s often used for operating support, which has been called the holy grail of fundraising, or to cover programmatic shortfalls. These funds typically arise through individual donations and fundraising events, but some foundations also provide such support.
- Bridge funding (also called temporary funding) is used to meet a short-term need when there’s an expectation that the organization will be solvent after the fixed time. This can occur, for example, in the event of a natural disaster, political unrest, or when grants or contract funding are promised but have not yet been received.
It’s wise for nonprofits to have written policies in place regarding how these types of funding are treated in financial books and separately accounted for, and when to decline certain types of funding. For example, expecting a small, restricted donation to support a program that’s not already operational may be unrealistic.
It’s worth noting that these are broad categories of support. Other types of funding – such as endowment support, in-kind contributions, executive loans, seed money, capital funding, program-related investments (essentially below-market-rate loans), capital support, etc. – can also be critical to your nonprofit organization’s success.