Grantmaker policies threaten nonprofits

September 29, 2009

At a time when U.S. nonprofits are being stretched by dwindling resources and rising demand, the policies of institutional funders may be making the sector's precarious financial position even worse, a new study says.

By placing restrictions on funding, foundations are hampering nonprofits' overall effectiveness, says the report from Grantmakers for Effective Organizations.

"The size of many grants and the strings attached to them often don't align with the results grantmakers are asking of their grantees," Kathleen P. Enright, president and CEO of GEO, says in a statement. "Many of the ways grantmakers provide financial support to grantees are actually counterproductive and can detract from nonprofits' ability to have an impact."

To be successful in fulfilling their missions, nonprofits must invest in their internal operations, including technology, facilities and human resources.

However, grantmakers restrict about eight in 10 grant dollars they award, leaving little for nonprofits to spend on their own sustainability, the report says.

At the same time, grantmakers often require nonprofits to following application and reporting processes that are time-consuming and burdensome, even when amounts sought are relatively small.

Effectiveness is also hampered by a lack of knowledge of nonprofit finance by both grantmakers and grantseekers.

Too often, neither party has a solid understanding of the costs required to deliver programs and services, the study says.

And while having a well-diversified funding base is generally encouraged for nonprofits, having too many funders can lead to higher management costs, "mission creep" and unorganized growth.

To better serve the nonprofit sector, the report recommends funders do a better job of listening to grantees, fully cover the costs of the services they are funding, streamline application and reporting processes, and consider alternative forms of funding, including program-related investments and cash-flow loans.

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