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Funding

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Boards should think carefully about how to secure income to fund their work and cover the costs of running the charity. It’s important for stability to make sure that income is from a range of sources.

Trustees also have a responsibility to make sure funds are secured ethically and legally in a way that supports the charity’s values.

Key funding questions for the board to consider

  • How stable and predictable is our income?
  • Are we dependent on a small number of income sources?
  • What other risks are there to our income?
  • How do we monitor our different income sources?
  • How much of our income is restricted, meaning we can only spend it on certain things?
  • Where we have restricted income, does it contribute to the costs of running the charity?
  • How much do we spend on generating income and is that a good return on that investment?
  • Is our approach to raising money ethical and supportive of the charity’s values?
  • Have we ensured compliance rules and codes of practice?
  • Are we open and transparent about our approach and how a complaint can be made?

Sources of funding

On this page we explore the considerations for different sources of income. A charity’s board needs to oversee these sources and apply particular considerations to each.Different sources of funding have their own advantages. Our section on fundraising methods explores many of these sources of income. Donations and legacies

Donations

Donations come from individuals through fundraising and legacies but they can also come from companies, or charitable trusts and foundations. Unless they’ have been given for a specific project, the most donations can be spent on any work which helps achieve the charity’s purposes.

Trustees need to monitor the income to make sure there’s a healthy return on the cost of generating funds.

Board considerations

  • Cost and return: It can be expensive to generate funds from individuals as a charity will need to invest in marking and relationships. The board should carefully consider and monitor the ratio of the investment and return.
  • Ethics: The board will need to monitor and agree on an approach which is ethical and true to the charty’s values. This will most likely require a policy which sets out the charity’s approach. This will cover rules on accepting donations and how fundraising activity is conducted.

Practice and regulation: Board needs to make sure the charity complies with regulation. Fundraising comes with its own set of rules and expectations. The Code of Fundraising Practice sets the standards for all charities. Registering with the Fundraising Regulator demonstes your charity is committed to good fundraising practice.

The Charity Commission also sets out its advice in Charitiy fundraising: a guide to trustee duties (CC20).. Where charities are funded by for- profit companies trustees need to be confident the partnership is in the charity’s best interests.

Grant funding

Grants are typically provided by the public sector or by charitable trusts and foundations. The money doesn’t have to be repaid and is usually exempt from tax.

Board considerations

  • Charitable purpose and status: Trustees need to be clear on how a grant helps the charity achieve it’s purpose.
  • Conditions and expectations: Grants almost always come with conditions. They are often for specific projects with expectations on outputs or outcomes and achieving agreed milestones.
  • Unspent money needs to be returned to the funder; sometimes the charity needs to match the grant with funds from other sources. Many grant funders will only fund organisations with charitable status.
  • Operations: Delivering on the expectations will impact on the charity’s ability to deliver other work and/or if the grant contributes to the core costs of running the charity.
  • Reporting: Most grants will come with some expectations around reporting. Larger grants often expect impact evaluation. Trustees should sure the charity can meet these expectations before agreeing to the grant.
  • Time-limited: Grant funding is typically for a limited period. It’s important for trustees to think about how the charity can continue to offer support and be sustainable afterwards.

Contracts

A contract is a form of trading where there’s a formal agreement between two parties. It means each party has agreed to do something and that if either of them fails to do it they’re covered both by:

  • the terms of the contract
  • contract law.

Contracts come with the same considerations as grants described above along with some additional considerations.

Board considerations (in addition to those for grants)

Tax: Commercial agreement and the income from it may be liable for tax and VAT

Contractual terms: It’s important to be sure the charity can fulfill all the terms of the contract, and provide evidence that it’s done so.

Trustees should also weigh up the risks of not fulfilling the contract and how this might impact the charity.

Full cost recovery: it’s important to be sure the contract income covers the true costs of delivery and if possible makes a contribution to the cost of running the charity.

The Charity Commission publication Charities and Public Service Delivery – An Introduction and Overview.

Trading

Many charities earn income by selling goods and services. This may be to:

  • members
  • service users
  • the general public
  • other organisations.

Some earn all their income this way.

Board considerations (in addition to those for grants)

Charitable purpose and tax rules: Charities can trade. Trading in a way which directly supports the purpose of the charity is unrestricted. This means your charity has flexibility about how to spend your earned income.

Due to this, the charity can also benefit from tax relief. If the trading activity doesn’t directly support a charity’s purpose and becomes a significant part of the charity’s income, there are both charity and tax law implications.

In this case, trustees should seek specialist advice. Setting up a separate trading company is a common way of managing this scenario.

Cost and return: Like fundraising trading requires trustees to weigh up the cost of generating funds and the income it generates, boards need to make sure the charity does not subsidise trading which doesn’t make a reasonable income. Especially where these activities don’t support the purpose of the charity.

The Charity Commission has specific guidance on Charities and trading.

Investments

All charities are able to invest, and investments can be a source of flexible income. However, adopting investment as a strategy for sustainable income requires the charity to have the capital to invest.

It also means that trustees need to manage investments closely to help maximise returns. Capital could be in the form of an endowment meaning there can be restrictions on how it can be invested and spent. It may however be that the charity has established an unrestricted fund which can offer more flexibility.

Trustees need to be mindful that investments can go up, but they also go down. It's important therefore to take care when investing. In many cases, this will mean seeking professional advice. There are also important ethical considerations about where it's appropriate to invest money.

Board considerations

  • Powers to invest: There may be restrictions on the power boards have to invest and it's important to first check the governing document to understand what powers the board has to make investment decisions.
  • Rules on investment: The Charity Commission has specific guidance to support trustees with investments these details what boards must and should do.
  • Risk and reward: Investments can go up as well as down and the board should carefully define the appetite for risk and decide how best to manage that risk.
  • Delegated decision making: If the board chooses to delegate decisions on investments to a subcommittee or individual the parameters of this should be clearly set and the board must retain overall oversight.
  • Investment policy: Trustees will need to establish the overall investment approach and objectives for the charity this can provide key objectives, a framework for where to invest, and the level of risk appetite.
  • Professional advice: It's often the case that where charities invest significant funds they will either appoint a fund manager to oversee the investment and be accountable to the board or they may seek other forms of professional advice.
  • Ethics and values: As with fundraising the board will need to monitor and agree on an approach to investment which is both ethical and true to the charity's values. Investment decisions can help to support the charity's purpose and align with values. The Charity Commission sets out key considerations on fundraising in its guidance.

Loan financing

A loan is a borrowed sum of money which has to be paid back, usually with interest. Loans are a flexible form of funding that can be quicker and easier to secure than other funding.

They, may require assets to be offered as security and will almost always come with interest payments. Charities with a track record and evidence of operations will likely find it easier to secure loans.

Board considerations (in addition to those for grants)

Powers: Not all governing documents will allow trustees the power to take loans or other financing options. Some governing documents will not allow trustees to commit the charity’s asset as securities for loans. Its important to check this before exploring loan financing.

Repayments and interest: Trustees need to consider if a loan is really in the best interests of the charity. Most loans come with interest and that will cost the charity money in the longer term. It may be worth exploring other options first. Trustees need to be confident that the charity can afford to meet the repayments without negatively impacting on the charity’s work.

Risk: With any plan there are risks. When plans involve loan financing, trustees need to factor the risk of their plan not working against the cost of the loan.

The lender: Trustees should make sure the charity is borrowing from a reputable lender. Any conflicts of interest should be identified and managed. Along with considering the rate of interest, the board should also apply ethical tests to how the lender does business.

Providers of loan finance to the non-profit sector include: BIGInvest, CAF Bank, Charity Bank and Co-operative & Community Finance and the Community Development Finance Association.

This page was last reviewed for accuracy on 29 April 2022

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