As your nonprofit grows and begins to accept donations, it’s important to establish rules around restricted gifts. Restricted gifts are donations that are made for a specific purpose. A donor may give $5,000 with the understanding that this money can only be used on marketing. In this case, you have received a donation, but you’re restricted in how you can spend the money.

Advantages to Restricted Gifts

The biggest advantage of allowing restricted gifts is your donor’s personal interest in your nonprofit. A donor is more likely to donate more money if they know exactly how it will be used. You can create a long-term relationship with a donor by successfully using the funds in the way they wanted. When asking for donations, you may end up getting restricted to the areas of your nonprofit you need the most. In this case, there really is no limitation to a restricted gift. Restricted gifts are also a way to keep your nonprofit accountable. Instead of wasting a donation or using it to cover overhead costs, you are forced to use it responsibility within a small area.

Disadvantages to Restricted Gifts

There are situations where accepting a restricted gift is not advantageous for your nonprofit. Restricted gifts require administrative hours to track. Some restricted donations may require specialized software to track where the funds are being applied, which could result in additional expenses. You must demonstrate that you have correctly spent restricted funds – especially in the case of restricted grants. Some donations may also be better suited if they were not restricted. For example, despite a donation restricted for marketing purposes, your nonprofit may already have a strong marketing profile due to other restricted funds, pro bono work, or community connections. A donation without restrictions would actually go a long ways in helping you pay your overhead costs of rent, utilities, or staff pay, but if it’s restricted, you can’t apply it to any of these expenses.

Establishing a Restricted Gift Policy

If you decide to accept restricted gifts, you should outline a policy to let your donors know the guidelines that will be followed. This policy will eliminate confusion about what the donor can restrict upon, how you will demonstrate that their funds are being used correctly, and the time frame for spending the funds. Your policy should detail how a donor should communicate the restrictions, what sort of documents are required, and what legal elements must be present. You may require a signature, notarization, or proof of identification.

Items to Include in Restricted Gift Policy

A restricted gift policy can outline the situations where a donor can receive a refund or how the donation can be converted to an unrestricted donation. You should also cover situations when your nonprofit can’t meet certain criteria. If a restricted donation was made for a staff retreat at a certain location, but the event had to be cancelled, your restricted gift policy should outline what should occur in this situation. Your restricted gift policy should clearly outline what language is accepted as intent and what will happen if it is unclear how the donor wants the funds to be used. Having this policy in place will let your nonprofit run smoother and your donors will be more comfortable. Start by deciding whether your nonprofit can accept restricted gifts, and communicate your plans to your donors as they support your cause.