The High Costs of Starting a Nonprofit and 3 Ways to Fund Them

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In the United States, about 1.5 million organizations are nonprofits. About 20,000 operate in states like Arizona. Regardless of their causes and location, the purpose remains the same: improve an aspect of human life.

To run a successful nonprofit, though, requires more than compassion or altruism. This organization needs money, and sometimes the amount it needs is high. How can then an individual or a small group start it without dealing with severe financial troubles later?

The Cost of Operating a Nonprofit

According to the 2016 report on nonprofits’ economic impact, those that operated in Arizona generated at least $28 billion in revenue. This made it almost at par with that of construction.

However, nonprofits are also burdened by a wide variety of costs. These include:

  • Certifications and fees — A nonprofit needs to be a legal entity and registered in the state where they plan to operate before asking for donations or support. Fees can vary, but states often charge no less than $100. The charges for filing Form 1023-EZ, which should exempt them from paying income taxes, could cost at least $275.
  • Labor — Contrary to popular belief, not all who run nonprofits are volunteers. Keeping salaried personnel helps maintain stability for the organization. Some groups may pay the minimum wage, while a nonprofit executive director could pocket $62,000, according to Salary.com.
  • Rentals — Running a nonprofit is challenging and complex, so a space becomes necessary. Having an office also makes it easier for donors and beneficiaries to visit the facility for questions and negotiations. An Arizona nonprofit may spend less on a commercial office than its counterpart in New York. The average cost of a class-A building in the state is $31 per square foot.
  • Insurance — Nonprofits need insurance for protection against liability or lawsuits, among others. But the options can vary and depend on what they need. Regardless, it can be as low as less than a thousand dollars to as high as nearly $2,000.
  • Fundraising — Charitable organizations can consider various funding models, including recurrent subscriptions. However, fundraising events can still generate huge amounts of dollars for a short period. How much should groups spend on this? Many agree that fundraising expenses should not account for over 10% of the total budget.
  • Other Expenses — These days, the most successful nonprofits run a website, the cost of which can range from around $500 to as much as $3,500. Other expenses are utilities, postage stamp, furniture, equipment and supplies, overhead costs from utilities, and even a vehicle.

person counting money

Options of Funding for Nonprofits

With plenty of expenses to pay even before a nonprofit can begin to operate, how can someone fund it? There are plenty of options:

1. Conventional Loans

Nonprofits in Arizona, for example, can approach lenders that offer home loans. Often, they can allow someone to apply for a home equity loan.

What is a home equity loan? It is a mortgage based on the difference between the house’s value and the remaining balance of the principal or first mortgage.

Usually, the interest rates are lower or equal to that of the primary home loan. The monthly payments, therefore, are more affordable.

Most of all, the homeowner can use the money for different purposes, such as using it as seed capital for a business or infusing cash flow to a nonprofit.

2. Collaborations or Tie-ups

Ronald McDonald House of Charities is less likely to go under since they receive excellent support from its parent company, McDonald’s. Someone’s nonprofit can also follow a similar route—that is, establish collaborations or partnerships with existing businesses.

While local companies can build their own, working with an existing one spares them the hassle of running it. Moreover, a tie-up with a nonprofit can help improve its public reputation and even boost employee morale. In both cases, the business wins from higher productivity and credibility.

3. Crowdfunding

Those willing to labor in marketing and state laws can consider raising money through crowdfunding sites. In these places, members donate a particular amount, usually in exchange for something. It can be a product or a service, depending on the nature of the organization.

Nonprofits can choose several crowdfunding sites, but each has pros and cons. The likes of Kickstarter are viral, but competition can be fierce.

In the end, the classic rules in managing finances can still go a long way to help nonprofits raise funds. These include planning potential expenses, forecasting much-needed money, budgeting, and cutting back on costs when possible. If they need more financial help, however, these three funding choices are worth exploring.

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