Should You Be Relying on Grant Funding?

Grant funding is part of the funding mix for most nonprofits. For some organizations, grants make up the bulk of their funding. However, few organizations can rely solely on grant funding. In part this is because grant funding is unpredictable. Both the number of grants received, and the awarded amounts, can vary considerably from year to year. In addition to the unpredictability of grants, there are other drawbacks. Five are outlined below. Before you embark on the pursuit of grant funding, you'll want to prepare for each of these challenges.

Challenges with Grant Funding

  • Securing grant funding takes time and does not happen overnight. Several months may elapse between the time you submit a grant application and the date the award comes through if your application is successful. If you need money urgently, grant funding is not going to be your best option. If you are interested in starting a nonprofit, think through how you'll cover expenses for at least your first year of operations because it may take a year (or longer) to secure your first grant.

  • Funders fund their priorities, not yours. Foundations and government agencies have funding priorities based on the issues of interest to them and in keeping with their missions. Not only do they have specialized interests, but they also have targeted outcomes they want to see realized. In awarding grants, their goal is to identify organizations that can bring about these desired outcomes. In other words, funders are not supporting your mission as much as their vision. This isn't to say that a funder doesn't support the mission of your organization. They may, but it isn't why they're giving you money. Funders are looking for a fit between what they want to achieve and what your organization can accomplish.

  • It's difficult to find grants that cover general operating expenses. Funders typically fund projects, because it's through projects that they realize their goals, and rarely give out grants for general operating costs. While funders do contribute to overhead costs through the project budget, it's rare to see grants dedicated exclusively to covering general operating expenses. Funders want the grant to cover costs directly linked to the funded project, not administrative costs. It's ideal when there's a fit between your interests and the funder's, but this doesn't always happen. If you accept a grant, you'll also have to accept limits on how you spend the money.

  • Grants often come with demanding reporting requirements. Writing the grant application can be the easy part. After you win the grant, you will be subject to reporting requirements. Annual or semi-annual program reports are common requirements, but sometimes a funder may also request quarterly financial reports. If you don't have staff already in place to handle both technical and financial reporting, receiving a grant is a mixed blessing. Before you apply for a grant, particularly if it is a small grant of $45,000 or less, review the reporting requirements and estimate how much staff time it will take to prepare the reports. Multiply the number of hours by the applicable hourly rate to get an estimate of how much the grant will cost to maintain. The administrative costs of the grant may outweigh the benefits.

  • Grants don't last forever. Grants can be multi-year, and a funder may renew project funding through a follow-on grant, but eventually the funding will end. The funder's priorities may shift; the foundation may close, or, if it's a government grant, there could be a government budget crisis. Relying on a steady supply of grant funding to support a project can leave an organization vulnerable. Although many grant applications ask the applicant organization to explain how the proposed project will continue to operate after the grant ends, the reality is that for most organizations, when the grant ends, the project ends. If you pursue grant funding, you'll need to be prepared to go through cycles of plenty and periods of lack. It can be difficult to orchestrate a seamless transition from one grant source to another.

It isn't that grants aren't worth pursuing. They are. But it's a risk to rely on grant funding exclusively, especially a single grant or a single donor. To set your organization or project up for long-term viability, you'll want to develop a funding strategy that includes multiple sources of revenue and creative use of your existing resources.

If your organization is just getting started and trying to land its first grant, the challenges above may be less at the forefront of your mind. It's hard to worry about what you'll do when a grant ends when you don't have a single award yet! Although it may be hard to focus on what you'll do in the future when a grant ends, as you establish your organization and search for grants, it's a good time to brainstorm about other sources of funding you can cultivate.  Creating multiple streams of income early on in your organization's existence can help you during your launch period, and later, as part of an overall sustainability plan once your initial funding is in place.

 Do All Types of Grants Have the Same Drawbacks?

Grants can come from foundations, corporations, and government agencies. All five challenges listed above apply to any grant, regardless of source. However, there are degrees of difference. Government grants (at least in the U.S.) tend to be for larger dollar amounts than grants awarded by foundations. Government grants also tend to be multi-year awards, whereas it is not uncommon for foundations (again, in the U.S) to award a grant with a project period of a year.

Multi-year grants have advantages. They provide your organization with a predictable income stream for a block of time, which enables you to focus on your work and be less distracted by funding concerns. But the longer project periods and larger grant size also introduce complexity. The reporting processes are going to be more elaborate with government grants, just as the application process for government grants is usually more involved than what you find with foundations.

Regardless of whether the grant comes from a foundation, a government agency, or corporate philanthropy program, you are likely to see similar challenges regarding the time needed to secure a grant and the difficulties in finding a match between what your organization wants to do and the funder's interests.

Complementary Funding Strategies

To make your organization more nimble and better able to adjust to inevitable fluctuations in funding, you should consider options to complement the funding you receive through grants.

To generate additional funding, you can do a range of things, including the following:

  • Hold annual fundraising events

  • Develop an individual donor campaign

  • Serve as a subcontractor on another organization's project

  • Apply for government contracts

  • Create and market products

  • Offer fee-based services

To reduce expenses your organization could consider:

  • Sharing office space with another organization

  • Working with contractors and consultants when possible instead of hiring full-time employees

  • Merging with an organization that has a similar or complementary mission, allowing you to share operating expenses and staff

  • Taking advantage of corporate philanthropy programs where companies "loan" highly skilled staff to a nonprofit (i.e. the company continues to pay the employee's salary) for short-term work assignments or year-long sabbatical

Having a flexible staffing model is beneficial because of the challenge, mentioned above, of covering basic operating costs. Grants pay for the personnel costs directly associated with the funded project and, through the overhead charged, also contribute to the salaries of staff in support and management roles. If your revenue is uneven, or you are relying heavily on a single, large grant for your operations, you may want to explore whether using contractors or temporary staff could be an option to help your organization cope with budget fluctuations.

Creating a Grant Strategy

Evaluating the costs and benefits of grant funding versus other forms of funding can help you develop a realistic plan for your organization's sustainability and future growth.

Grants can help an organization grow in ways that would be difficult through other fundraising strategies. Other options, such as events and direct solicitation, may bring in cash donations but often not in the amounts needed to start or scale a project. However, grants come with trade-offs, including loss of autonomy. If you want to be in full control of how you use your funding and the direction of your organization, pursuing other sources of funding should be an essential part of your business plan.