Busting the myths around unrestricted funding

Reimagining Philanthropy is our philanthropy digest bringing you the latest insights, ideas, and discussions about innovative ways we can reimagine our sector; supporting and platforming the communities who can drive real change for a fairer, more sustainable, and stronger future.

This week’s issue follows ‘Stop funding projects’ which discusses how funders should consider funding organisations through unrestricted support over choosing grantees by project.

This piece will explore some of the common misconceptions funders have when considering shifting towards more trust-based models of flexible and core funding.

Unrestricted funding refers to funding which is not bound by the funder to a particular purpose, and can also be called core funding, unrestricted giving, general operating support (GOS), framework agreements, or strategic/programme grants.

Busting the myths around unrestricted funding

Myth 1: There are no measurable outcomes

As unrestricted funding is geared towards a more complex, systemic view of what success and impact might look like, it is an understandable reservation for funders to be concerned about measurable outcomes.

Funders are held to account by their boards and their communities, and even if they are readily decreasing the amount of ‘strings attached’, having some kind of outcome framework can build buy-in for unrestricted funding amongst stakeholders and improve communications between the funders and the grantees. 

The TCC Group TCC Group have published an outcomes framework for funders to use as a guide for measuring outcomes of unrestricted funding which has four categories:

1.)     Grantee programme effectiveness: Often organisations will have measures for this as they will need them for charitable purposes (for example, in the UK charities must report these to the Charity Commission in annual reports) and for non-unrestricted funders. Examples of this include increased programme outputs, launch of new programmes, reduced cost per outcome, etc.

2.)    Grantee organisational development: This refers to the overall capacity of the organisation, as unrestricted funding often fills funding gaps for hiring new staff, developing new systems, or training. Outcomes can be increased reserves, improved adaptability to changing environments, a decrease in staff turnover, etc.

3.)    Funder mission achievement: Building on the ways that (1) and (2) achieve a funder’s mission, this category refers to the way that providing unrestricted funding can improve relationships with grantees and better a funder’s reputation which can lead to leveraged funding opportunities.

4.)    System strengthening: Overall, unrestricted funding is aimed at a wider, more systemic approach to change than focusing on projects, so assessing impact at this scale needs to be part of this framework. Ways to look for this include greater collaboration between organisations, less redundancy in programmes, and better ability to align on systemic level goals such as policy change and collective impact.

Myth 2: Lifting restrictions invites misuse of funds

Ceding a certain level of control over the use of funding often makes funders nervous about the increased risks over that funding. Misuse of funding has moral, financial, and reputational costs for the organisations involved, and so it is a valid concern. However, there are ways to mitigate this risk.

The most important part of this is trust and relationship-building. Giving unrestricted grants with fewer reporting requirements does not have to mean washing your hands of communication with your grantees. In fact, the process before and during unrestricted grants is best handled when forming a strong relationship between the funder and the organisation is a priority, so the grantees are comfortable being honest with the funder about their challenges.

Many funders offering unrestricted funding also support organisational development as part of their investment in an organisation’s future, whether by providing training from their in-house team or by providing extra grants restricted to team development. Where a funder has concerns about the grantees’ financial management or governance, this can help reduce the risk of misuse and further conversations with the recipient organisations about how vulnerabilities can be mitigated.

Another useful tool is for funders to familiarise themselves with the audit compliance required for organisations in their operating country, and to use these audits as a way of assuring stakeholders who may be concerned about providing unrestricted funding. For example, in the UK, charitable organisations with over £25,000 annual income must arrange an independent audit of their charity’s accounts.

Myth 3: Ending unrestricted grants creates a funding cliff

As unrestricted funding is about supporting long-term development of organisations over short-term results, the case for unrestricted funding is often made alongside the importance of multi-year grant cycles. So natural concern is that an organisation can become dependent on covering core costs from one source providing long-term unrestricted funding, creating a funding ‘cliff-edge’ when that grant ends.

Writers from the Fund for Global Human Rights discussed the worries around the funding cliff in an article for the Chronicle for Philanthropy, particularly regarding large, one-time, unrestricted grants. The article says that, as a one-time gift, there is not much opportunity to build a relationship with the funder that could help with the risks of a funding cliff.

Another concern is that unrestricted grants can be incredible boosts to reserves that will stabilise an organisation by providing a buffer of operating costs against any financial shocks, but an Ecorys report on how voluntary, community, and social enterprise organisations perceive financial resilience cites how organisations can hesitate to do this in case holding significant reserves makes them ineligible for other grants.

Whether or not an organisation faces a funding cliff at the end of a long-term unrestricted grant can be determined by the use of the grant. If an organisation is able to use the grant to invest in methods that drive towards greater financial security, spending down the grant can act as a ‘ramp’ over time to bring the organisation up to a higher income and therefore greater ability to deliver on programmes. Funders with trusting relationships with their grant recipients can support them through this process.

Which reservations have you heard about unrestricted funding? Are there any myths you think are important to discuss which we’ve missed? Let us know in the comments!

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