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The 10 donor funding red flags for non-profit organisations

While most donors make sure they undertake due diligence to ensure the recipients of their funds are ethical, accountable and transparent, it is rare to find a non-profit organisation taking the same trouble to check their donors’ reputations and records.

Last month, thanks to the whim of a capricious, privileged wealthy donor, a number of people lost their jobs. Without any engagement with the CEO, a member of the organisation’s board was verbally informed that the relationship had ended and that the next tranche of substantial funding due a few weeks later would not be paid. Unfortunately, this anonymous donor had refused to even have her name on a contract so could not be held to her commitments. Luckily, the organisation itself proved to be resilient and will survive, continuing its important work. 

This is a lesson for non-profit organisations to take care when accepting money from donors. While most donors make sure they undertake due diligence to ensure the recipients of their funds are ethical, accountable and transparent, it is rare to find a non-profit organisation taking the same trouble to check their donors’ reputations and records.

It is understandable that organisations can find themselves in difficult financial straits — this comes from the tax regime under which non-profits work in that they are forced to rely on donor income, and if donors seek an 18A tax certificate, those funds cannot be accumulated but must be spent within 24 months. 

In addition, donors don’t like seeing “underspend” or savings. The immediate response is that the organisation overbudgeted or underdelivered. As a result, non-profits have realised that they need to generate their own income alongside donor money, and this can be done as long as those activities are closely aligned with the organisation’s founding purpose that has been approved as tax-exempt.  

Following donor money merely to keep the lights on can ultimately result in significant damage to the recipient of those funds, especially if the donor is simply using the organisation to deliver on non-aligned organisational strategies. 

So what are the 10 red flags for organisations when assessing a donor?  

  • First, it is important to check that the values of the donor and the recipient are aligned. Shared values are the basis of trust and commitment, and any discussions around funding should not only focus on what the funded programme is about, but what the purpose of the recipient organisation is and whether the donor is aligned with its overall objectives.

  • Second, accessibility is important and there should be some level of face-to-face engagement. Ultimately, people give to people and there should be an understanding between the two entities as to who is responsible for making the grant and who is accountable for the funding. A connection between the two point-people is important in ensuring a smooth relationship. Donors who hide behind websites or work through intermediaries could be of concern.

  • Third, while the CEO and even the board meet with the donor personally, the insistence on public anonymity could be questioned, although it can be understandable in the case of individual donors who don’t want to be inundated with requests.

  • Fourth, however, if this is tied to verbal promises, rather than hard contracts, bells should start ringing. Without written pledges or signed contracts, the organisation opens itself up to enormous risk, even when it all looks good and there is a sense of trust. Money may initially arrive in the bank account, but the lack of written agreements might mean that further promised funds never arrive or that the agreed purpose of the funds can be disputed. Anonymity that reaches into the unwillingness to sign documents is indeed where an organisation can open itself up to donor whims and fancies.

  • Fifth, take note of those donors who wield money like a weapon and insert themselves in the operational side of an organisation, making demands as to what needs to be done, who does it and how to do it. There should be clear boundaries where a donor’s role ends and the organisation’s begins.   While philanthropic giving is clearly part of a continuum of activism and development, donor and recipient play different roles. Advice can be freely given and is often highly appreciated, but in the end the delivery is up to the organisation that has been established with a specific role and with the expertise to deliver its services.

  • Sixth, if the non-profit organisation has had no prior dealing with the specific donor, undertaking some due diligence with other recipients of their funding will do no harm. Questions to ask include whether payments are made on time; whether they are accessible and open to contact; whether they themselves are transparent (for example: Do they have a website? Does it clearly explain their focus, their existing grantees and who serves on their board?). Do they make continual judgments on how funding is allocated even though they have agreed to a particular budget? What has been their record when withdrawing support from an organisation — did they have an exit strategy or did they believe that a warning was adequate or, as mentioned above, did they just renege on their commitments?

  • Seventh, an organisation needs to ask itself if it wishes to engage with a donor who demands excessive reporting, especially if the funding is not particularly large. These reports are extremely heavy on administrative time and the cost ratio needs to be taken into account. Excessive reporting  implies a lack of trust on the part of the donor and this could be questioned. 

  • Eighth, take care when a donor demands high-profile recognition for their funding. Recognising donors is good practice. This can involve something as simple as a thank you letter, through to naming a building after a donor. However, donor reputations can change and it is important to go back to the issue of shared values and ensuring that if your organisation is transparent and therefore makes public its list of donors, they will want to be associated with that person or company into the future. Donations are not meant to white/greenwash donors’ reputations.

  • Ninth, it is important to follow your intuition when it comes to accepting funds. Do you feel that the donor is condescending or judgmental about your work? While this is not always obvious, many activists have a sense when they are being patronised or when the donor is not listening but continues to proffer opinions and advice. An organisation needs to ask itself if this is how it wants to operate over the duration of a grant.

  • Tenth, the non-profit organisation should assess if there is a power imbalance. While the donor has the financial resources, the organisation has the capacity to turn those resources into good. It is important to build a mutually beneficial relationship with a full understanding that this is a partnership. However, this is a professional partnership and again there should be clear boundaries with equal respect. 

Donor-grantee relationships are often bumpy, and misunderstandings occur. Sometimes, grantee organisations feel that they are not trusted when donors indicate dissatisfaction. However, this often means that the donor is actually fearful of seeing the misappropriation of funds, that the recipient is not implementing agreed projects or programmes or that the outcomes do not match those presented for funding support. It is important for a non-profit organisation to listen carefully to donor concerns and respond accordingly and transparently. One of the worst things an organisation can do is hide information from its donors, especially if things go wrong.

The best response to any kind of mishap or failure is to inform the donor immediately, before anyone else does, and to explain what will be done to ameliorate or fix the problem. Most donors accept that social change can be unpredictable and may well assist with advice from their own experiences. However, hearing things in the rumour mill does not create confidence and may well end the relationship. 

Funding relationships in the non-profit sector are enhanced by open communications, transparency, personal connections, possibly through site visits, timeous reporting, full accountability, sharing of achievements and mutual recognition of the role of both donor and the recipient in social development. 

Social change takes time, and long-term trusted associations between both entities are where real change takes place. It is important to identify the opportunities for genuine relationships that align with the values and strategies of both parties.

Shelagh Gastrow

Gastrow Consulting

Shelagh Gastrow provides advisory services to the philanthropy sector, higher education advancement and non-profit sustainability. She works with individuals and families on how to integrate their wealth and their values into meaningful and effective philanthropy. From 2002-2015 she was founder and executive director of Inyathelo and focused her efforts on strengthening civil society and universities through programmes to develop their financial sustainability whilst promoting philanthropy in SA. Her work has gained public recognition locally and internationally.

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