How to Set Up a Nonprofit Endowment Program

A nonprofit endowment is a common financial resource for charitable organizations. If your organization is relatively new, you might not yet have explored this option or fully understand what it is and how it works.

An endowment is a donation of money or property to a nonprofit organization that creates investment income. For example, an endowment could be financial assets such as bonds or equities that earn interest or dividends. It could also be a property that generates rent. The principal balance of the endowment is usually kept intact, and the investment income it creates is used as working funds. A nonprofit can't tap into the principal of an endowment unless the donor or court allows it.

Setting up an endowment for a nonprofit can be a good strategy for building funds for the future. However, it may not be the best choice for every nonprofit. It's important to understand the pros and cons so you can make the right decision about creating one.

Advantages of a nonprofit endowment

An endowment is considered to be a symbol of strength for an organization. It demonstrates to the community that your nonprofit is trusted and likely to be around for a long time. It's a vote of confidence that could impress potential donors, either for regular fundraising efforts or additional endowments.

Endowments also provide an unrestricted amount of funding. Once you secure an endowment, you get to reap the investment income in perpetuity. It's a steady stream of fundraising money that you can count on every year.

An endowment also gives nonprofits a chance to build strong relationships with donors. The arrangement creates a partnership where both sides are invested in the organization's long-term success.

Potential pitfalls

Some endowments specify how the income can be spent. A donor may stipulate that the money only go to certain programs. This may restrict a nonprofit organization's ability to expand its services.

Another disadvantage is that endowments aren't a guaranteed form of income. The gift could decline in value or not keep up with inflation, impacting the amount of funds it generates in the future.

Creating an endowment also requires a larger investment of time. It's one thing to ask for and receive a donation. Sourcing an endowment will take relationship-building with the community. In fact, many nonprofit organizations have a single staff member whose only job is to manage endowments. If your organization is just starting out, you may not have the resources to pursue this form of funding.

How to start an endowment

When setting up an endowment for a nonprofit, you need to determine the amount of money it takes to fund your organization each year. Consider all of your income forms, such as donations and product sales. Then determine how much money you want your endowment to generate. Use this as your goal.

Building an endowment is a long-term project, one that takes time and cultivation. Endowment donors are looking to leave a legacy—gifts often come after a donor dies, because they're frequently included in wills. You'll need to effectively communicate why you're pursuing endowments, how you plan to use the money and why a donor should make a long-term commitment to your organization.

While you can start an endowment on your own, you'll want to work closely with an accountant, an attorney and your nonprofit business banker to make sure it complies with your state's requirements.

Even though endowment campaigns are similar to fundraising campaigns, you should always prioritize meeting your immediate needs. Make sure you have enough money coming from donations or other sources of income before you commit time to fundraising for an endowment.

Is a nonprofit endowment right for you? It could be. Start by getting in touch with your banker and working with them to chart the right financial course for your organization. Endowments could be a smart long-term strategy for the future of your nonprofit.