A nonprofit endowment is a donation of assets, money, or property an organization invests in to create interest income. The revenue gained from the interest is used by the organization to grow and strengthen its mission.
While the idea of a regular deposit in your bank account sounds ideal, you need to be aware of how you can spend the money coming in. This depends on the type of endowment managed by your organization.
The three types of nonprofit endowments are:
A permanent or restricted endowment is made by a donor with specific directions on how and when the funds are to be used. This is often given in a will or partial contributions over time.
A quasi-endowment is established by the organization using reserve funds. The funds are not restricted so the board of directors decides how to use the funds. Quasi-endowment funds are usually established as a way to generate income for a long time.
A term endowment is money set aside for a limited timeframe as decided by the donor. After this timeframe, the principal amount can be used however the organization sees fit.
The biggest benefit of a nonprofit endowment is providing a long-term source of income for the organization. This helps support the organization's operating budget and ensure its long-term financial health.
Steps to Setting up an Endowment for Your NPO
To get started with an endowment fund for a small nonprofit, review the health of your organization. Put a plan in place for the use and management of endowment funds.
Determine Your Immediate Needs Before Establishing an Endowment
Before you decide to restrict your donations to endowments, review the health and needs of your organization. Do you have enough revenue coming in to meet short-term goals? If you’re struggling to meet the basic expenses and goals of your organization, you may not be ready for an endowment.
Establish an Endowment Fundraising Strategy
Many organizations use multiple funds to support their organization. If you have plans to grow using endowment funds, you need to have a fundraising strategy.
Create a strategic plan for your organization that shows donors how their endowment will be used to achieve growth. Have a specific amount and total dollar goal to share when you ask for their support.
Document How the Endowment Will Be Used
The donor may give direction on what the fund should be used for. For a quasi-endowment, you need to establish clear boundaries and goals with your board of directors. Document how the funds will be invested, what the returns will be used for, and how and when the principal asset will be distributed.
Select or Hire an Endowment Manager
You’ll need to have a staff member capable of managing the nonprofit endowment. If your organization is managing very large endowments, you may have a dedicated endowment manager.
At the very least, you need someone who understands how to maximize the endowment through investments. This can also be a third party who knows how to actively manage your endowment.
Know the Benefits and Challenges Before Establishing an Endowment
There is no right or wrong answer as to whether your organization should establish an endowment.
The most important thing to do is review the benefits and challenges to decide if an endowment is right for your nonprofit, for your donors, and for your community.