How Do Fundraiser Bonds Protect Nonprofits?
Some nonprofit organizations hire professional fundraisers to help them reach their funding goals more quickly and easily. But how do nonprofits know that the professionals they choose to work with will appropriate the funds in full? One way government agencies help curb professional fundraising fraud is by requiring individuals and businesses to purchase surety bond insurance before they can be licensed to work on behalf of nonprofits and other organizations.
Fundraiser bonds are not like financial bonds that are used for investment purposes, nor are they like performance bonds that provide financial returns to investors. Although insurance companies underwrite bonds, they do not function the same way as traditional insurance policies.
Thousands of individual surety bond types exist, each providing a specific type of financial protection that depends on the bond's purpose and its contractual language. Despite their individual differences, all commercial bond types work in the same basic way. A simple surety bond definition explains that surety bonds join three parties together into legally binding contracts.
- The principal is the professional fundraiser who purchases the bond as a financial guarantee of future work performance.
- The obligee is the government agency that requires the bond as a way to regulate professional fundraisers and reduce the likelihood that nonprofits will be taken advantage of.
- The surety is the insurance company that underwrites the bond, thus providing a financial guarantee of the fundraiser's ability to do his or her job appropriately.
Fundraiser bonds are a specific type of license and permit bond, which government agencies often require before certain professionals can be licensed to work. License and permit bonds function as lines of credit that can be tapped into to pay for monetary losses or fines that result from licensing violations made by, in this case, professional fundraisers. Simply put, surety bonds guarantee professional fundraisers handle funds ethically.
Each professional fundraising bond provides a financial guarantee that charitable funds will not be mismanaged or misplaced by professional fundraisers, which are typically defined as any individual, corporation or other entity that solicits funds, assets or property for compensation. If a nonprofit experiences any losses, damages or penalties due to the performance of a professional fundraiser, the bond amount can be used to reimburse the agency.
The amount the protection bonds provide varies depending on state specifications, but it typically falls between $10,000 and $25,000. The bond amount is used as a financial guarantee, so the higher the bond amount, the more financial protection is afforded.
The surety bond application process is also used to keep unqualified individuals from working jobs through which they might take advantage of consumers, businesses or nonprofits. For example, those who have bad credit scores or other poor financial credentials typically have difficulty getting approved for a professional fundraising bond. Or if they are, they might have to pay a much higher premium to purchase a special bad credit surety bond. If an individual cannot qualify, or pay for the needed bond, he or she will be unable to work as a professional fundraiser.
In summary, if you work with a nonprofit organization that has decided to use a professional fundraiser, be sure the individual or company is licensed according to state laws. If your state requires professional fundraisers to be bonded, verify that your partner has a valid surety bond on file with the state. Doing so could keep your organization from losing money at the hands of an unethical professional who's just looking for an easy way to scheme unsuspecting philanthropists out of money.
Danielle Rodabaugh is the chief editor for the Surety Bonds Insider, the surety industry's leading publication that tracks legislative changes and news updates within the market. As a part of the agency's educational outreach program, Danielle educates consumers on their rights under surety bond protection. In her free time Danielle volunteers as a photographer for the city of Columbia, Missouri, and advocates for the Christian Foundation for Children and Aging.