Everything You Need to Know About Endowment Funding

At Convergent Nonprofit Solutions, we have long emphasized the role of investors over donors for ROI-driven fundraising. Reliable, long-term support gives nonprofits the resources and stability they need to create impactful outcomes. Endowments are the pinnacle of these nonprofit investment principles. However, endowment funding flips the roles putting your organization in the driver's seat behind investments and ROI. By investing nonprofit assets to generate passive income, endowments can help you earn reliable funds without depending solely on external contributions.

So what are endowments? How does nonprofit endowment funding work? How can you establish and grow your nonprofit's endowment? Our capital campaign consultants are here to unpack everything you need to know about nonprofit endowment funding. 

What is a Nonprofit Endowment?

An endowment is a pool of money (also called a principal) invested to generate passive income for a nonprofit's mission and programs. Endowment funds are typically held in perpetuity meaning the principal is continually reinvested. Meanwhile, your nonprofit can use the endowment's income to support your mission.

How Do Nonprofits Establish Endowments?

Endowments are typically established with contributions from individuals, corporations, or foundations. Donors or investors, as we call them may make a one-time gift to establish an endowment or make ongoing contributions over time. A nonprofit might also complete a capital campaign dedicated to starting an endowment, as we recently supported for the Indian River Community Foundation.

In other cases, nonprofit organizations may start an endowment fund with the leftover money they have at the end of a successful year. For example, if a campaign raises more than its target goal or a project costs less than estimated, you might use the extra funds to set up an endowment. 

How Endowments Work

When an endowment is established, the nonprofit organization typically works with a financial advisor to invest the funds in a diversified portfolio of stocks, bonds, and other assets. The goal of the investment strategy is to generate a steady income stream for the organization while preserving the principal.

Income generated from the endowment may support ongoing programs and services, cover operating expenses, and ensure long-term sustainability. This revenue can also be reinvested into the endowment to help it grow over time. Many endowments are established for specific purposes, such as supporting a particular program or scholarship. However, unrestricted endowments allow the nonprofit to use the funds for any purpose supporting the organization's mission.

The Pros and Cons of Nonprofit Endowment Funds

Naturally, endowments aren't for every nonprofit organization. There are some pros and cons to consider before diving in.

Cons of Endowment Funding

• Upfront Investment: While endowment funds can fuel your mission long-term, this does come at the expense of an upfront investment. If your nonprofit doesn’t have the resources to spare, a capital campaign can kickstart this process. 
• Opportunity Cost: Naturally, most nonprofits are eager to fuel their mission with every extra penny that comes their way. Endowment funds require an initial upfront investment from your nonprofit or a noteworthy contributor diverting funds away from more short-term needs. Thankfully, your nonprofit will get this money (and more) back over time. 
• Maintenance Costs: Endowment funds require constant maintenance—which comes at a price. Many nonprofits turn to third-party financial institutions to manage their endowments. Naturally, this will require some ongoing maintenance costs. However, endowment funds should give much more than they take, making it worthwhile for most nonprofits.

Pros of Endowment Funding

• Passive Income: Endowments bring in reliable income for your nonprofit, making it easier to achieve your goals and support your mission. 
• More Time for Your Mission: For most nonprofits, every operating expense relies on an external contribution creating a constant need for fundraising. However, when your nonprofit has an endowment, you will need fewer capital campaigns giving you more time to focus on your mission.
• Peace of Mind: Financial uncertainty can distract from your mission and hurt your outcomes. Endowment funds give nonprofits the peace of mind they need to move forward with confidence. 
• Stability: The stability of an endowment can keep your nonprofit afloat during times of economic uncertainty.

Establishing and Growing an Endowment Fund

Establishing an endowment fund requires careful planning and consideration. Nonprofits may want to work with a financial advisor on endowment funding to ensure the fund is appropriately configured.

When establishing an endowment fund, nonprofits should consider the following factors:

• Purpose: The purpose of the endowment fund should align with the organization's mission and values. Nonprofits should consider whether the endowment will support a specific program or service or be unrestricted.
• Gift acceptance policies: Nonprofits should establish gift acceptance policies that outline appropriate types of gifts for the endowment fund.
• Investment strategy: Nonprofits should work with a financial advisor to develop an investment strategy that balances risk and return to align with the organization's mission and values.
• Governance: Nonprofits should establish a governance structure for the endowment fund that includes policies and procedures for managing the fund, selecting investment advisors, and distributing income.

Growing an endowment fund requires ongoing effort and attention. Nonprofits should establish a fundraising strategy to reach existing and new potential donors. Nonprofits should also consider planned giving programs, such as bequests and charitable gift annuities, as a way to grow the endowment fund over time.

Contact Convergent for Help with Endowments and Nonprofit Campaign Support

For capital campaign support, Convergent Nonprofit Solutions is here for you. Our experts provide end-to-end services from managing your feasibility study to capital campaign consulting and ongoing resource development. We invite you to contact our experts for more information or to start today!