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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.
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 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.
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.
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.
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:
Contracts come with the same considerations as grants described above along with some additional considerations.
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.
Many charities earn income by selling goods and services. This may be to:
Some earn all their income this way.
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.
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.
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.
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.
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