In restricted giving, the donor tells the recipient organization how to use the donation. Unrestricted giving frees up the recipient organization to use the donation as it deems fit. Both forms of giving have advantages and disadvantages.
Restricted giving allows donors to track the direct impact of their contributions, enhancing their personal philanthropy narrative. It allows donors to control how their funds are used, offering a sense of ownership and the ability to support specific causes. While this builds trust and accountability, it can also limit an organization's flexibility.
For the recipient organization, restricted giving is limiting. It denies it the flexibility to exercise discretion in its financial decisions. They can't allocate funds where they're needed the most.
Unrestricted giving enhances an organization's impact by letting needs drive action. It also demonstrates trust in the recipient organizations.
Most restricted giving is meant to limit overhead expenses like staff salaries, travel, rent, and utilities. Although restricted giving ensures funds are used for specific purposes, it limits an organization's flexibility, particularly during emergencies. Permanent restrictions can leave critical areas underfunded, while mismatched priorities may burden organizations with less practical donations.
Restricted gifts do not always align with organizations' priorities. One donor may gift an organization's artwork. Another may donate a building. If the gifts come with conditions not to sell them, and the organization can't extract value out of them presently, they may be off-putting.
Unrestricted giving, on the other hand, gives the recipient organizations control over funds. That translates to maximum flexibility to meet various organizational needs. Unrestricted giving also frees up organizations to plan long-term, meaning greater stability and longevity.
The priorities of a nonprofit can change, and unrestricted funds allow organizations to respond to changing circumstances and priorities. They also free up organizations to receive restricted funds and keep promises to the donors.
A desire to support a particular humanitarian effort is the main driver for restricted giving. Designated giving can also stem from mistrust. Accountability and transparency may encourage more donors to give unrestricted.
There are ways to make restricted giving less limiting for organizations, like avoiding permanent restrictions. For example, a donor may allow a not-for-profit to use their funds for other causes after they've completed the main project.
Another way to restrict donations without burdening the recipient organization is to give only to non-profits specializing in areas one's passionate about. Another option is for the donor and the recipient organization to partner for mutually beneficial projects. For instance, the Source of Hope Foundation often partners with organizations on projects its founders are passionate about. In partnership with MercyCorps, the Foundation built aquifers to supply clean water to Derashe and Konso communities in Ethiopia.
Another option is to find common ground. For example, a not-for-profit may ask the donors to allow it to apportion a certain percentage of restricted funds to general operations.
Depending solely on restricted funds can severely limit an organization. Diversifying funding sources, regularly assessing the funding mix, and building unrestricted reserves help prevent the starvation cycle resulting from underfunded overhead.
Designated giving is increasingly becoming the go-to approach because it gives donors a sense of control. However, it denies not-for-profits the ability to prioritize projects with the most impact. Even so, people tend to give more when funding causes they’re zealous about.
