14 Oct Did You Know: The Key Differences Between Restricted and Unrestricted Grants by Roxanne Jensen, Ed.S, GPC

Before I began working as a grant consultant, I did not understand all the details and intricacies of grant budgets, including the difference between restricted and unrestricted funds. I remember working with one nonprofit that was thrilled to receive a significant grant for program staff salaries, only to realize later that they could not move those funds elsewhere when a staff member unexpectedly left the position, and it took three months to find a replacement. They could not use any of that money for other programming or general operating expenses, which made the organization feel they had missed out on money on which they previously budgeted. This experience taught both me and the nonprofit the benefits and challenges of having restricted funding in their budgets.

If you are working with grants as a consultant, or even working as a grant professional within a nonprofit, getting a handle on the differences between restricted and unrestricted grants is going to make a big impact on how you approach funding and budget development.

Restricted Grants: Targeted and Controlled

Restricted grants are exactly what they sound like—funds that are designated for a specific purpose or project. Funders who provide restricted grants want to make sure that the money is only used for certain activities or programs, with clear guidelines about how the funds must be spent. Recipients must understand these restrictions and carefully track how they spend these funds.

While restricted grants have distinct benefits in supporting specific initiatives, they come with their own challenges. Restricted grants often require detailed reporting and compliance. This documentation and reporting ensure that recipients stay compliant with grant terms and no funds were redirected outside the scope of the original grant agreement.

Unrestricted Grants: Flexible and Freeing

Unrestricted grants provide more freedom than restricted grants. Funds from unrestricted grants can be used wherever the organization needs them most, including paying for overhead costs, administrative staff salaries, or unexpected emergency expenses.

Nonprofit organizations need to build strong relationships with funders who offer them. The more trust funders have in the organization, the more likely they are to give unrestricted support. Building trust takes time and patience. Building trust involves demonstrating sound financial management and showing funders how the organization uses funds responsibly to reach its goals.

Key Takeaways:

Here are two critical points to remember when distinguishing between restricted and unrestricted grants:

• Restricted grants are focused: Restricted grants come with specific guidelines about how the funds must be used, and nonprofits must follow these terms closely.
• Unrestricted grants are flexible: Unrestricted grants allow organizations to use funds wherever they are most needed, providing greater financial freedom.

Personal Reflection:

So, one could ask the question, is it not better for a nonprofit if all of its funding is unrestricted? If you are asking yourself that question, you are not the first. It is true that an organization that is working with entirely unrestricted funding does not need to worry about where in its budget it allocates its funds. However, this same organization also limits itself to a small pool of possible funders who provide unrestricted funding. Restricted grants can fuel a nonprofit’s programs, greatly increasing the impact of an organization. It is important for nonprofits to maintain a healthy balance between restricted and unrestricted funding, ensuring that they have the resources they need to fulfill their mission and remain financially sustainable.

You can find other blog posts in this series here. AGS also offers several on-demand webinars on a variety of topics to support the full grant cycle, including grant budgets, post-award management, and building relationships with funders. Check out our website to learn more and sign up for our training newsletter.

If you are interested in grant services, training, or federal review services, or are interested in our career opportunities,  Julie Assel, CGMS, GPC, President/CEO will be happy to talk with you about this opportunity and provide you with a quote for grant services.

Competency #4: Knowledge of how to craft, construct, and submit an effective grant application

• Skill 4.7: Identify various types of grants and their restrictions.

Competency #5: Knowledge of post-award grant management practices sufficient to inform effective grant design and development

• Skill 5.2: Identify strategies for fiscal management and compliance with funders’ requirements.
• Skill 5.4: Identify methods of establishing transitions to post-award implementation that fulfill project applications (e.g., document transfer, accuracy in post-award fiscal and activity reporting).

Competency #8: Knowledge of methods and strategies that cultivate and maintain relationships between fund-seeking and recipient organizations and funders

• Skill 8.3: Demonstrate knowledge of strategies for increasing an organization’s access to unrestricted funding sources.