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ASU Lodestar Center Blog

What is the impact of restricting donations, and how does a nonprofit find balance?


Not all revenue streams are created equal in the nonprofit sector. They are often riddled with limitations and unrealistic expectations. Rarely do funds cover operational or administrative costs and often they may have additional matches or indirect expenses needed to fulfill all requirements. The long-term sustainability of a charity is dependent on unrestricted funding sources allowing the organization to determine how and where resources should be focused. 

Restricted Funding

Restricted funding has been the standard for many charities to accept with a smile while figuring out how to work within the limitations set forth. This can lead to skewed budgets, falsified accounting practices and loss of stakeholder trust. Restricted funds can be a result of grants, donor requests or specific fundraising campaigns. John Fisher of CHARISM learned a lesson in restricted funding when he accepted a grant for new computers. Unfortunately, the grant only covered the hardware, not the software, furniture or education. This cost his organization thousands of dollars in indirect expenses, leaving him frustrated and fiscally short for the year. 

A recent Bridgespan study shows only 20 percent of nonprofit funding is unrestricted, leaving organizations pigeonholed into running only programs they have funding for and skimping on the organizational or administrative side of the charity. This bleeds into the culture of the organization, leading to increased turnover rates and decreased program quality. This results in unmotivated employees who feel unappreciated and left behind in their peer groups. 

Finding Unrestricted Funds

The New Life Center (NLC), led by Rob Swiers, provides support and shelter for those afflicted with addiction and homelessness. Swiers found the organization had stagnated due to the restrictions placed on them by their funding sources. In order to grow he needed to provide a regular stream of unrestricted income. His answer was to open a thrift shop. The shop receives community donations that are sold in the thrift shop, creating a regular stream of income for the charity. While they are subject to UBIT, or Unrelated Business Income Tax, Swiers believes it is worth paying in order to maintain a sustainable income source for his nonprofit. 

Nonprofit organizations must create a gift acceptance policy. This policy should include a disclaimer that all gifts will be considered unrestricted unless the donor designates a restriction. This verbiage can open the conversation between the donor and the charity regarding the importance of including operational and administrative costs in their bequest. Another benefit to a gift acceptance policy is the ability to preserve organizational reputation by holding the right to refuse donations from sources that may be detrimental to the public perception of the organization.

Other ways to obtain unrestricted funding include asking your stakeholders to make their donations unrestricted, strategically creating partnerships and seeking Pay-For-Success type opportunities. Remembering that not all donations have to be accepted can help reduce indirect and unintended expenditures. It is imperative that diligent budgeting and research is done before accepting restricted gifts. Ask whether they require additional matching funds, are there indirect costs, and do they adequately cover your organization’s operational or administrative costs?  

Restrictions placed on nonprofits limit their ability to function successfully and there are often multiple options for the organization. Finding a balance between restricted and unrestricted funding sources takes time and effort, but the results will lead to long-term growth and sustainability for the charity.

Heather Aal is a graduate of the Master of Nonprofit Leadership and Management program at Arizona State University. A graduate of North Dakota State University, Aal has dedicated herself to building strong programs in her community benefiting children and family working in roles at Boys & Girls Club of the Red River Valley and Better Business Bureau. She hopes to continue her work by teaching ethics and leadership classes and assisting nonprofit organization through consulting and board work. Heather lives in Fargo, North Dakota, and has three adult children.


ASU Lodestar Center Blog