Funding Models for Nonprofits: Choosing the Ideal Model for Your Nonprofit

Nonprofit programs that intend to make a long-term, meaningful impact on their communities need to be well funded. For many nonprofits, this means focusing on traditional funding sources, such as donations and grants.

More and more, however, nonprofits and charities are seeing the need to use more diversified funding models. These might include more business-like models like product sales or fee-for-service. This might also mean including membership and subscription models that can bring in more regular income to support community programs.

The benefits of such diversified funding streams are multi-faceted. Not only will diversifying revenue streams help make your programs more sustainable, you will also be able to expand your network and grow your overall organization, allowing you to make a greater impact on your community. Moreover, diversifying your funding streams will impress those affected by your programs, including community members and investors, and show your group is worth supporting.

In this article, we'll examine a variety of funding models for nonprofits that you may want to adopt for your funding streams. These will include everything from traditional donations to earned income strategies to corporate partnerships and peer-to-peer fundraising. As you learn about all the diversified funding opportunities for nonprofits, you'll understanding how adopting multiple fundraising tactics with the right online tools is not only possible but essential for the continued sustainability of your organization.    

Traditional Nonprofit Funding Models Encourage Philanthropy

When considering an effective model for funding nonprofits, most organizations turn to a traditional funding model such as donations and grants.

Organizations that rely mostly on large grants from wealthy philanthropists or foundations tend to use the "Big Bettor" approach. Many of these groups tend to focus on environmental problems, such as Conservation International, or medical issues, such as the Stanley Medical Research Institute. In many cases, the group's founder is also the primary donor, allowing the group to start with good backing. Since the problems these groups deal with can often be solved with a great deal of money, they can attract large philanthropic donations as well as government support. 

Groups that rely largely on individual donations use a "Member Motivator" model. These organizations tend to be religious, environmental, or art groups and provide services for their members. Thus, they are able to attract many donations from community members who benefit from the activities they provide.

Problems arise when donations become sporadic and unpredictable, making it difficult for nonprofits to plan their budgets and sustain their programs. Donor generosity can vary depending on the season, and economic uncertainties can also play with giving patterns.

Likewise, not all nonprofits can attract large grants, and grant opportunities can become limited based on competition and changes in philanthropic behavior. All this creates an unpredictable cash flow that can make it difficult for charities and nonprofits to sustain their activities. Thus, it's useful to adopt additional strategies to offset any uncertainties with nonprofit funding.  

Earned Income Strategies Help Raise Money

Earned income strategies provide nonprofits with the opportunity to earn revenue from services or product sales related to their mission. This provides a charity with the ability to generate self-sustaining income using business-like activities.

One of the most popular and well-known examples of an earned income strategy are Girl Scouts cookie sales. This practice of letting girls learn sales techniques by selling boxes of cookies to community members coincides with the organization's mission of teaching young women business skills while offering a product most people enjoy -- cookies. Profits from the sales help fund Girl Scouts activities, providing a regular source of income.

Additional examples of earned income strategies include Habitat for Humanity's ability to raise funds by selling donated items to the public through their ReStore volunteer-staffed shops. Other nonprofits might sell T-shirts, rent space, or even license technology.

Understand that in order to not be taxed on your earned income, the source of your income must be related to your mission. The Girl Scouts can earn untaxed income from cookie sales since it relates to their purpose of building courage, confidence, and character in girls, but an animal shelter selling pizza would most likely be taxed on its earnings since they would be considered unrelated business income. Thus, it's generally a good idea to focus your earned income strategies on products or services directly related to your group.   

Membership and Subscription Models Bring in More Funds

Membership models allow your group to provide a series of special benefits and services to their members in exchange for a recurring fee. This provides you with a regular source of income for your programs. And if your group can attract a significant number of members, this can result in increased engagement (from members who want to get the most out of their dues) as well as better advocacy of your mission from your base.

For example, a trade association offers educational and networking opportunities for its members in exchange for an annual fee. As the association builds up its membership, it secures more funding and consistent revenue streams. This in turn lets the group grow, provide better services to its members, and advocate for more positive changes in the community.

Problems arise when nonprofits start losing members. Fewer members means less funding, which can affect the quality of the services offered, resulting in more members leaving. 

To avoid this, there are numerous strategies you can employ, including:

• Collecting and using member feedback: Employ surveys and focus groups to learn what your current members enjoy about your services and any additions they'd like to see made. Make it clear that your group will respond to any email, phone, or in-person inquiries (and back this up with regular communication with your members). Many nonprofits lose members by focusing too much on attracting new members instead of taking care of their existing members, so this is an excellent way to measure how happy your clients are with your services -- and make any appropriate adjustments.
• Offering membership tiers: Create a membership model where you offer different benefits based on the fee your members pay. Each tier can provide access to different networking opportunities, discounts, or one-on-one consults. By doing this, you make it more affordable for people to join your community while also providing a sense of exclusivity for those who pay to be in the more high-ranking tiers. This in turn motivates others to upgrade their membership if they see how others are benefiting from higher-level services.
• Personalizing member experiences: This links back to collecting and using member feedback, but also involves catering to individual needs. Get in the habit of addressing members by their preferred names and communicate with them through preferred channels (email, phone, etc.). Create a database of their interests and behaviors and use this to recommend services and content that relate to their needs. The more you employ these strategies, the more valued and welcome your members are likely to feel, making it easier for you to retain them.   

Corporate Partnerships and Sponsors Provide Financial Support

Forming partnerships and gaining sponsorships from corporations provides plenty of benefits for both nonprofits and business partners. Corporate partners can provide financial support for nonprofits in the form of grants, donations, or matching gifts that help raise more revenue during fundraisers. Corporations can also donate other valuable forms of support, such as products or services for charity auctions. In addition, many corporations have programs where their employees are required to volunteer with nonprofits, providing your organization with valuable manpower and potential long-term supporters.

On the flip side, supporting nonprofits creates excellent goodwill for corporations. This is particularly true when a corporation's own mission matches the nonprofit's. For example, a chain of pet supply stores can gain excellent publicity by supporting the activities of animal shelters or animal rights groups. The partner can promote their corporate partners during fundraisers and other activities, helping to build and sustain a positive brand image for their business partners.

Of course, nonprofits must be careful to enter into partnerships with corporations whose values and business practices align with their own. Big corporations may be able to provide nonprofits with financial support, but if their businesses also contribute to the social or environmental issues your organization is fighting against (i.e. pollution, unhealthy lifestyles, discrimination), then this could generate a lot of unfavorable publicity for your group in the long run.

Then there's the risk of becoming too dependent on a corporate partner or sponsor's support. This can lead to problems if your partner is suddenly unable to continue providing support due to business reversals. This can also affect a charity group's own activities, if the support from their business partners and sponsors leads them to engage in practices that align with their sponsor's needs and not necessarily their own mission.

For this reason, it's important to choose corporate partners whose values align with your mission. Likewise, it's important to continue diversifying your models to maintain solvency even when some of your backers can't provide the necessary funds.

Crowdfunding and Peer-to-Peer Fundraising Increase Donations

Digital fundraising continues to be an effective way to support your programs using innovative methods and strategies. Where traditional in-person fundraisers may be limited to the donors in your immediate community, digital fundraisers like crowdfunding and peer-to-peer fundraisers enable you to reach out to wider audiences whose collective efforts can lead to huge financial results.

Crowdfunding, for instance, allows you to raise revenue for a project or program by enabling a large number of individual donors to make digital donations within a given amount of time. Used with great effect by small businesses and startups, crowdfunding has also been used to raise large sums of money for nonprofits. Since a crowdfunding site can reach wide audiences, even small donations can quickly add up to a substantial amount, especially if you back your crowdfunding campaign with a good story that explains what their contributions will help make happen. 

Indeed, according to The Chronicle of Philanthropy, crowdfunding campaigns done through GoFundMe have raised $30 billion since 2010. Some of the most successful campaigns time their crowdfunding during periods like Giving Tuesday where donations tend to be larger and more numerous. And while many crowdfunding campaigns target a nonprofit's existing supporters, some can attract bigger audiences, especially if the campaign is designed to raise funds for big causes such as disaster relief. 

Similarly, peer-to-peer fundraisers makes use of digital platforms by letting your supporters construct their own fundraising websites and circulate them among their own online peer groups. The funds raised will then be sent to your fundraiser. Since individual social networks can reach large audiences that may not already be in your current donor pool, launching a peer-to-peer fundraiser not only lets you raise more money but also helps educate new people about your mission, potentially attracting more volunteers, supporters, and long-term donors.

Successful peer-to-peer fundraisers clarify the problem the nonprofit is addressing, what steps it will take to solve the problem, and what each donor's contributions will go toward. For instance, if your nonprofit is trying to raise funding to build a bigger community center, your supporters need to know the details of what problems the center will help solve, how much funding is needed, and what the donations will be used for (supplies, labor etc.). Each supporter can then add their own personal story to their peer-to-peer website, perhaps sharing how your group's works have impacted them and why they trust your organization. This helps build trust, using the goodwill you've gained from your supporters.

Moving Forward

Every charity organization has dreams of making a major impact on their community, preferably for the long-term. In order to accomplish this, however, nonprofits need to not only be well-funded but gain sustainable sources of continual funding.

Employing a mix of different funding models helps create this long-term success. Rather than becoming overly dependent on one or two funding sources, using multiple strategies ensures you'll always have other options to turn to when and if one funding source fails to generate adequate income. By raising revenue through individual donations, corporate partnerships, grants, digital fundraisers, memberships, and earned income strategies, you can not only gain the finances needed to run your programs but also staff them with more volunteers and promote your mission to a wider audience.

Indeed, using multiple funding strategies expands a nonprofit's support base, making it easier for nonprofits to expand their operations and educate more people about their mission. Thus, it is imperative that your leaders re-evaluate their current strategies to see where they can adopt an additional funding model or modify an existing one to reach a wider pool of donors.

One way to start evaluating your fundraising strategies is by using an online platform like PayBee. Our software helps you assess the performance of your past fundraisers by analyzing your data, leading to insights on the type of new models you need to include. You'll also be able to build and organize your peer-to-peer fundraisers with PayBee's user-friendly platform and promote your corporate partners in multiple spaces on your fundraising materials.

Learn how our software can help you expand your funding models by signing up for a free demo of our platform. You'll be able to explore the platform on your own and experience a virtual auction just like your sponsors and donors. Plus, our team of experts will be available to answer all your questions on how our online tools can be applied to fit your needs. Having the right platform really makes a difference when hosting successful fundraisers, so sign up for a free demo and see what PayBee can do for you!

FAQ's

What are the most effective funding models for small charity groups?

All the funding models listed above can help raise revenue for small nonprofits. Big nonprofits or nonprofits with greater brand recognition may have a better chance of becoming the beneficiary of certain large philanthropic grants aimed at well-known organizations. Nevertheless, individual donations, grants, corporate sponsors, earned income strategies, digital fundraisers, and membership models are all valid ways of raising revenue for small nonprofits. Ultimately, diversifying funding models as much as possible is the wisest strategy for a small nonprofit to remain financially solvent.     

How can nonprofits attract and secure corporate partnerships or sponsorships?

Leveraging existing connections is an excellent place to start securing corporate partnerships and sponsorships. If your board members have relationships with local businesses and corporations, then getting an introduction from them could be the best way to request support from the CEO or manager. Family members, friends, volunteers, and staff may also have connections with the business community you can explore.

When approaching a business that has no preexisting relationship with your group, then be sure to spend a lot of time crafting the ideal sponsorship letter. Address your letter to the right person in the organization. Offer a succinct description of your nonprofit's mission and the type of support you are seeking. Provide examples of how your values align with your potential sponsor's and list the benefits of a partnership (good publicity, VIP access to events, free advertising etc.). Clarify the next steps (scheduling a phone call, meeting with a rep from your nonprofit) and let them know how you will follow-up by phone or email. 

How can nonprofits maintain donor engagement in peer-to-peer fundraising efforts?

Build your peer-to-peer fundraiser around an exciting event that will encourage both donors and supporters to participate. Many successful peer-to-peer fundraisers involve an athletic event like a 5K run or walk-a-thon. People circulating peer-to-peer fundraising sites among their social networks can be required to raise money for an entry fee, motivating them to encourage their friends to donate so they can participate.

Make each peer-to-peer fundraising site visually engaging for visitors. This can be done by sharing photos or videos related to your nonprofit's mission and/or the fundraising event. Make sure to detail what the campaign is raising money for, how close you are to your goal, and suggested donation amounts.

Be sure donors can contribute easily to your campaign. This can be done using the right peer-to-peer fundraising platform like PayBee. Not only does this easy-to-use software make it simple for people to donate to your campaign, it makes building additional fundraising sites easy for supporters who want to circulate their own peer-to-peer websites to their social networks.