Unrestricted Funds: 4 Best Practices to Increase Your Social Impact

As a grant management professional, the funds you award help support important causes and positively impact communities.

You can give two types of funds to organizations: restricted and unrestricted. Restricted funds can only be used for a specific purpose or project, which cannot be changed. These funds are traditionally more common, as most grants and corporate donations are restricted to specific purposes or programs. 

In recent years, more and more foundations have begun giving unrestricted funds. One of the most prominent proponents of unrestricted funding is Mackenzie Scott, who has donated $13 billion in unrestricted grants to 277 organizations since 2019. 

In an analysis of Scott’s grantees, The Center for Effective Philanthropy found that such funding was ‘dramatically and profoundly positive’ for the recipients. The funds empowered leaders within organizations. improved morale and energized workers, allowed for re-granting or other forms of collaboration, and served as a “vote of confidence” in conversations with other donors, who were more likely to donate as a result.

With a major donor like Mackenzie Scott demonstrating impact through unrestricted grants, giving in this way has a lot of potential. In fact, one of the main reasons why more organizations don’t award unrestricted grants is that they are unaware of unrestricted funds and their benefits.  
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What are unrestricted funds?

When you award funds to a grantee without any conditions on their use, they are called unrestricted funds. Organizations can use these funds to support the overall mission of an organization and are not required to use them for a specific project or purpose. 

Unrestricted funds can be used for whatever purpose the grantee deems necessary, including indirect or overhead costs, and help improve its long-term health. Having enough funds to cover such critical expenses ensures that these organizations are healthy enough for the meaningful growth and development of their programs. 

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Benefits of unrestricted funds

Especially in the wake of the pandemic, which required a more flexible approach, more people are becoming aware of the advantages of offering unrestricted funds instead of traditional restricted grants. Unrestricted funds help: 

• Reduce complexity and cost of audit for the grantee, simplifying accounting and reducing administrative work required.
• Enhance flexibility from the grantee when required by ensuring they have the ability to change how funds are used in response to real-world events.
• Encourage long-termism by reducing the short-term focus by nonprofits.

Running a program or project can be very costly, with salaries, insurance, annual filing expenses, healthcare, electricity, and internet fees being only some of the common expenses. These items are called “overhead,” and is seen as negative by funders. Higher overhead means less grant money would be spent on achieving the mission of an organization. 

However, without these expenses, an organization cannot run effectively, or at all. Nonprofits typically struggle to find ways to fund these necessary expenses. Having some discretionary funds available helps nonprofits sustain their good work in tough economic times, which is when they are needed the most.

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4 best practices for awarding unrestricted funds

When unexpected events happen, the organizations you support should be able to accommodate new realities. This is what unrestricted funding aims to accomplish. Transparency in operating costs is important. I also feel that trust and confidence are equally important.

But to ensure that your unrestricted funding is impactful, you foundation should do its due diligence with regards to selecting grantee nonprofits and the causes they support. 

Here are four best practices you should follow while awarding unrestricted grants:

1. Carefully align your mission
   Unrestricted grants give you much less control over where there are used. Because there is a large amount of trust required between you and your grantees, you should make sure that their mission aligns with your foundation’s values. Doing this due diligence upfront will make it easier to trust your partner organizations to use the resources you provide in a manner that aligns with your priorities. Communicate what outcomes matter most to you most, and assess whether your missions align. You can even search for local nonprofits doing work you care about, and support them to make a difference close to home.
    
2. Focus on DEI
   A recent report found that nonprofits led by people of color are often overlooked by funders, receiving less in funds and had more strings attached to those funds, which reduced their ability to get desired outcomes. This is one of the main disadvantages of restricted funds - strict terms and conditions apply to who can receive the funds in the first place. Many organizations that serve traditionally under-served communities tend to be under-resourced and may not have the necessary registrations or certifications to qualify. These ‘non-qualified donees’ are very important to reducing inequity and making a tangible difference on the ground. As a funder, you have the power to ensure that you mindfully view your grantmaking through an equity lens, which is becoming even more important in 2023 and beyond. Unrestricted funds will allow you the flexibility to counteract existing power imbalances and biases that may affect who you decide to trust, and make sure that your funds are going to serving disadvantaged groups.
3. Measure your impact
   Being able to measure and communicate your impact to stakeholders will ensure the long-term success of your grantmaking or corporate giving prorgams. Especially with unrestricted funds, being able to collect both qualitative and quantitative data is important to get a comprehensive understanding of your impact. Using a platform with good reporting capabilities will show you what worked best, and help you improve your CSR programs. 
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4. Use a specialized tool‍

In addition to reporting, a grant management platform like Optimy improves all your processes. You can store all your data in one place, including all documentation for grant applications, and seamlessly collaborate with both internal and external parties. 

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Amplify your impact with grant management software

Ultimately, unrestricted funding gives grantees the ability to plan their activities in advance, as well as the flexibility to respond to changing conditions on the ground. They strengthen organizations from within and help them support disadvantaged communities. 

By using specialized grant management software like Optimy, you make your processes more efficient and are able to accomplish more in less time. Instead of manually processing applications and creating reports, Optimy helps you spend more time building strong, trusting relationships with partner organizations on the ground and help them maximize their social impact. 

Want to learn more about how you can successfully implement unrestricted funding? Contact our team of CSR experts and find out how Optimy can help! 

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