How to Start an Endowment for Your Nonprofit

Endowments Are Good for Any Nonprofit

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Maybe you think endowments are just for large nonprofits such as universities and hospitals.

But an endowment is something a nonprofit of any kind and size can attain. It is also something that can ensure your organization against the future.

What Is an Endowment?

An endowment is a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment.

Usually, only a portion of the interest or earnings from the endowment (typically 5%) is spent on an annual basis to assure that the original funds will grow over time.

Professional money managers often oversee endowment funds, investing the money in stocks, bonds, and other instruments.

What Are the Advantages to an Endowment?

Stability is the main reason to have an endowment. Small and new nonprofits often only think about the current fiscal year or the next payroll.

It is important to get out of that financial trap as soon as possible. An endowment helps diversify your organization's income and reduces your dependency.

That you have an endowment can be enormously comforting for donors too. You can also offer donors the option of providing a gift that will keep on giving well into the future, and the opportunity to fund the needs of the moment such as operating and program funding.

What Are the Disadvantages of an Endowment?

You might be criticized for having an endowment or for having too large of an endowment. Some well-known universities have come under attack recently for growing huge endowments while claiming not to have funds for other uses.

Small nonprofits are sometimes criticized for not spending every dime on current needs. Even funders such as foundations might slight an organization that already has money. 

How to Get Started With an Endowment

First, think about how much you want to have in your endowment ultimately. You might look at the amount of money needed to fund your organization annually.

You know that some of that money comes in through your normal fundraising efforts and some through fees from your clients.

How much would you want to come from your endowment? One expert recommends that you have at least three times your annual operating budget as a minimum endowment.

You can start an endowment with any amount of money, however small. But to build an endowment of any size is a long-term project. You will need to cultivate donors over time since many endowment gifts come as a result of a bequest upon the donor's death.

Your board will need to set up the rules of the endowment. For instance, you will want to name the endowment, restrict its use, and provide guidelines for how much of the interest can be used yearly and when the endowment principal might be tapped if needed under extraordinary circumstances.

The endowment can be set up within your existing nonprofit corporation, or it can be spun off into a separate organization. 

Although it is not expensive or difficult to start an endowment, you will want to get some help.

Your community foundation may be able to help you, including holding the endowment for you.

Also, work closely with your accountant and attorney so that your endowment is in compliance with your state's requirements.

Raising the Money for Your Endowment

Explain to potential donors why you are setting up an endowment. How do you plan to use the endowment and its earnings?

Answer any questions in all of you fundraising materials for the endowment, provide them on your website and include them in the material you supply to your volunteers who will be "selling" the endowment to prospective donors.

Find out if other organizations similar to yours in your community have endowments and how they use them. These facts will be helpful to show that what you are doing is not unusual, much less illegal.

Position your endowment building as good-stewardship that will help ensure that your organization will be able to continue doing good in your community for many years to come.

Make sure that your fundraising for the endowment is in addition to your fundraising for immediate needs. Fulfill your need for operating funds before funding an endowment. 

Likewise, make sure you have a "rainy day" fund that can be tapped quickly should unexpected problems arise for your nonprofit. An endowment is not a rainy day fund.

Not every donor is a prospect for endowment fundraising. Since wills and bequests are usually the main components of endowment fundraising, it means that you will want to choose your donors carefully and cultivate them over an extended period of time.

Endowment donors are interested in leaving a legacy and providing for the long-term future of the organizations they support.

The best way to ensure an ongoing effort for the endowment is to set up a planned-giving program and market it through special materials, seminars, events, and a legacy society.

Build a persuasive case for your endowment. Why should your donors make a long-term investment in your organization? How will their gift change lives, even save lives in perpetuity?

Explain how your organization will be a good steward of the donor's gifts. Provide options for donors to make their donations and explain how you will recognize donors or what benefits they will receive.

Why Wait?

Just like any savings program, starting early works. Even in less than ideal economic situations, the groundwork can be laid for building an endowment. It is not a task or goal that will be achieved overnight. Begin now and your organization will be in a much more stable financial position years down the road.

For tips on how to set up your endowment, make your case to your board and donors, and how to raise endowment funds, see How and Why to Prioritize Endowment Fundraising.

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