Grant Funding vs. Earned Income

Should you rely on grant funding to start your business?

Any new business that is started must generate some income to stay in business. The number one cause of business failure is lack of sufficient funding. To further complicate this, the people who start nonprofits often have big hearts and little knowledge of how to generate income. Some even want to provide all of their business services for free because the people they serve may not be able to afford them. To be successful, all businesses, including nonprofits, must reach a level of financial self-sustainability.

Some of these struggling businesses resort to giving money away to try to pay all of their bills. They have the mistaken belief that “self-sustainability” is when you get other sources (like grants) to pay your bills.

Grant funds are generally not designed to start a business, pay annual salaries, or pay off debt. Most grants are designed to help pay part of the cost of new or expanding programs/projects.

When a grant applicant has no income from work or another source of income, they are a financial risk. Grant funders don’t like giving their hard-earned money to a business with high financial risk. Therefore, before a nonprofit organization applies for any grant, it must first develop a couple of other sources of income to strengthen its financial status.

Perhaps the most common activities for nonprofits are organizing fundraisers. Fundraising events can range from car washes and bake sales to naming rights sales. The most successful fundraising event is the walk.

Another option is the UBI. UBI (Unrelated Business Income) is income generated from an activity that is completely outside of the nonprofit’s mission. An example might be having a place that serves food to the public in a hospital. Serving food as a restaurant is outside the mission and scope of work of the general hospital. When a fundraising activity is very successful, it could become your own independent for-profit business.

Earned Income. On the financial statement, earned income is much stronger than donations or gifts. Depending on the nature of the nonprofit business, there are various methods of generating earned income. Almost all nonprofit organizations can sell products and services. Additional sources of income earned include membership due and interest earned.

A nonprofit organization is a corporation and must be managed as such.