Find Out the Difference Between Donations and Grants

Non-profit organizations rely on outside funding sources to support their operations and achieve their core mission. NPOs can raise money in many ways, and donations and grants are among the most common sources.

As key decision-makers, you often need clarification on these two sources, especially regarding how the money can be used, the related tax implications, and choosing the right option for your NPO finance needs. This deep dive into the difference between donations and grants will empower you to make the right decisions and ensure your organization’s financial stability.

What is a Donation?

Donations are monetary or in-kind gifts individuals, families, or corporations provide to non-profit organizations. They are usually collected through various events and programs such as fundraising events or galas, annual or quarterly appeals, telethons, auctions, food drives, etc. This funding source can support your organization in many ways, including day-to-day operations, buying resources, or funding programs and services.

Building reliable donor programs is vital to fundraising accounting practices for US NPOs. Without a stable donor base and steady fundraising processes, you could face financial instability and issues with achieving your mission. With essential business services for non-profits, you can access specialized advice and donor management systems to help you develop and maintain your donation sources.

What is a Grant?

Grants are funds provided to non-profit organizations that can be used to fund projects, pay for training or resources, or to conduct research. Organizations must submit a grant proposal describing the project they hope to fund and the money they need. These proposals undergo a rigorous review process, after which only specific projects or programs receive the requested money.

Grants don’t have to be paid back. Still, as part of their NPO finance and accounting practices, organizations must report how they are spending the grant money and prove that it is being put to good use. Grants help non-profit organizations access vital resources and continue working towards their mission. They also encourage NPOs to take risks and innovate and, in some cases, provide them with greater credibility by linking them to reputed funding bodies and government organizations.

Donations vs. Grants: What’s the Difference?

Now that we have familiarized ourselves with donations and grants, let’s explore the differences between these two crucial elements of fundraising accounting practices for US NPOs. Although both funding sources help organizations achieve their mission, they have vast differences in factors such as acquisition, predictability, restrictions, and time frames.

Acquisition

Non-profit organizations must follow a different process to acquire donations and grants. While donations can come from various channels such as fundraising events, donation drives, events, or directly through the organization’s website, grants can only be obtained through a formal grant application process and are typically associated with funding organizations, government bodies, or foundations.

Predictability

Unlike grants, donations are predictable because if you have annual fundraising drives and build a reliable base of donors, they are likely to donate the same amount or more than the previous year. This means that, after a while, you can analyze the data, identify donation trends, and make more accurate projections as part of your non-profit budgeting practices. Conversely, grants are a less predictable funding source since there is no guarantee that you will receive the grants you applied for. Additionally, you may receive different grants yearly, depending on a rigorous and competitive application process.

Restrictions

The most significant difference between donations and grants is the purpose for which they can be used. Grants fall under the ‘restricted funds’ category, meaning there are specific time and purpose restrictions on grant money. When non-profit organizations receive grant money, they can only use it for the purpose stipulated in their grant proposal. However, donations often don’t have any restrictions placed on them. They can support anything that contributes to realizing the organization’s mission.

Time Frames

Just as grants restrict how the money is being used, they also have time restrictions. Non-profit organizations must ensure that the grant money awarded to them is being used within the period described in their proposal. If an organization receives a year’s funding to launch a new program, it must establish alternative funding to maintain it after the year ends. Donations, which don’t have any such time restrictions and can be ongoing, are often used to ensure programs can continue to run even after the time-restricted funding ends.

Choose the Right Funding Source For You

There are a variety of funding sources and models that you can choose from, depending on your organization’s unique needs. Here are some steps you can take to determine which funding model suits you best:

1. Plan: Having a clear plan for what you hope to achieve and what you need to get there. This includes creating a detailed fundraising plan to ensure your efforts are proactive and well thought out.
2. Brainstorm and explore: As part of your planning process, get your team together to brainstorm different fundraising sources and models that could work for you. Explore other similar organizations’ strategies and whether those would work for you.
3. Regularly reevaluate: Embrace continuous improvement and evaluate your funding sources and models. Look at what works well with your non-profit budgeting and accounting processes.
4. Decide and deploy: Once you have all the data, decide and reach out to donors, grantors, or sponsors for support. Use technologies such as donor management systems to help you stay organized and keep track of your funding needs.

Want more support with funding for your non-profit organization? In addition to HR, benefits, recruiting, and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping, and accounting) and Risk (business insurance). Talk to an expert today.

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please get in touch with us here.