August 19, 2015

First Things First: What You Need to Know (and Do) Before Seeking a Grant

Grant seeking can be an exciting and often, a challenging adventure. Here at The Grant Plant, we get several calls each year from eager, passionate people who want to start a nonprofit, and who are seeking information on how to find and write grant proposals. Unfortunately, when people hear the word “grant,” they may see flashing dollar signs. While grant seeking is a wonderful way to diversify your funding streams, it is not always the best first step when you are just starting to develop and build the capacity of your organization. While some nonprofits are lucky enough to get start-up capital through grant seeking, the reality is that few grant makers will invest in new organizations. It is best to be prepared and have a diverse funding plan that includes seeking capital from multiple avenues, i.e., fundraising events, individual donors, and earned income.

In fact, the world of grant seeking is competitive whether you are a new organization or highly established with a wonderful record of accomplishment. Cheryl New and James Quick, authors of Grantseeker’s Toolkit, contend that competitive grant proposals typically place in the top 10% of the applications submitted to a funder. They say that when you can get your proposals to place in the top 10% of the heap, you can expect 3-4 out of 10 of the proposals you submit to be funded (2007). Even that is “just” up to a 40% success rate (shameless self-promotion: TGP’s success rate on submitted grant proposals in 2014 was 62%). The Foundation Center’s Foundation Growth and Giving Estimates (2004; most recent data available) found that only one-third of foundations received fewer than 50 proposals per funding cycle and only 38% of those foundations funded at least half of those submitted. These sobering statistics emphasize the importance of being well prepared before writing your first grant proposal.

Grant seeking is more than a “write application-win award-receive money” process. There is a foundation that must be in place before an organization should consider grants as a source of funding.

Let us start at the basics, shall we? A grant by definition is, “a sum of money given by an organization, or a government department, for a particular purpose” (Merriam-Webster, 2015). It is money given to your organization, but here is the catch: it must be used for a purpose that is usually outlined and agreed upon beforehand by the grant seeker and funder. This purpose will most often address a need that you have identified in the community and detail your solution to that problem. It is important that others, including funders, see the problem as pressing. The challenge of case building is demonstrating that the need is significant, that you have a unique strategy to address the need, and that your organization has the resources and capabilities in place to successfully solve the problem.

The grantor-grantee relationship is an investment partnership. Funders think through their award decisions carefully, and an account of activities and finances will be required that detail how the money was spent, whether your activities matched your plan, and whether you achieved the results you promised in your original grant proposal. Grant monies are not free monies.

First things first, most foundations will require you to have 501(c)(3) status or a fiscal sponsor to even be eligible to apply.

Setting up a 501(c)(3)

For a 501(c) (3), you must first apply and be approved for a federal EIN number, as a business through the state (with Articles of Incorporation), and then apply for a tax-exempt determination letter from the Internal Revenue Service (IRS) at the federal level. A good overview of the process can be found at:

Minimal requirements for attaining the non-profit ruling include:

  • Board of Directors – You need to have an established body of leaders who can help guide the organization’s mission, purpose, and financial decisions. Funders will want to see a list of those governing your organization. Often people start with family members, friends, and mentors as the basis for their board of directors but as the organization grows it will be important to seek out community leaders, representatives of your target population, subject experts, and others with an interest in the mission of your organization to join your board. These individuals will bring depth, knowledge, and important points of view to your board. It is also a good idea to include an individual with a background in finance who can offer advice and guide financial decisions.
  • By-laws – These are the formal policies and procedures that the board of directors has approved and the organization will follow. You will need to draft and finalize the by-laws prior to filing your Articles of Incorporation.
  • Articles of Incorporation – Articles of Incorporation are formal documents filed with the state of New Mexico (or whichever state you will be operating in) that legally document the creation of a corporation. The Secretary of State website lists the forms necessary to file for incorporation in New Mexico.

Getting a Fiscal Sponsor

A fiscal sponsor is an existing charity that will serve as a fiscal manager of funds and allow use of its tax-exempt status, usually for an administrative fee, which is generally a percentage of revenue flowing through the sponsor. The sponsor is assuming some risk as well as administrative burden and may also have restrictions limiting the type, location, or activities of organizations they sponsor. Requirements for fiscal sponsorship vary by the sponsoring agency, but typically include things like having a board or advisory committee in place, having and using an annual budget, and submitting various general and funding related reports to the sponsor. For example, the New Mexico Community Foundation expectations and requirements are available for download. Note that many grant makers will not accept fiscal sponsorship, though those with a history of funding start-ups often will.

Expectations from Grant Makers

Many grant makers also have a number of requirements that must be in place in order for an organization to be eligible to apply for funding. These items are also helpful in getting your nonprofit started, organized, and on its way to established.

  • An established mission, vision, and plan of action for your organization – You must know what your purpose is as an organization and how you are going to use that purpose to meet the current needs of the community you are set up to serve. Having that purpose codified in board approved statements is important. This clarity of purpose is also important information to have when you are looking for funders. You want to apply only to funders whose mission and vision align with your own.
  • An organizational budget – You need to have a clear picture to present to funders about the revenue, expenses, and bottom line of your organization. Funders want to know that they are investing in an organization that can properly manage money and is reliable in reporting how grant funds are spent. In most cases, funders want to see a diverse funding stream and do not want to be the sole organization supporting your nonprofit.
  • Financial Management Infrastructure – It is important to have an established accounting system in place, including a bank of residence where you do all of your business banking. This is where a financial advisor would come in handy on your board of directors. Having clear processes and procedures to account for income and expenses and a tracking system that keeps separate accounting for grant funds demonstrates your organization is ready to manage funder monies. Typical areas include established bookkeeping practices, financial policies and protections, and processes for regular board or board treasurer review and approval of financial statements.
  • An Organizational Presence – You should have basic charity identity pieces in place before applying for grant monies (also good to have for other funding sources), such as a website, letterhead, dedicated phone line, and branded email address. Funders may not expect bells and whistles from a startup but they will expect a professional presence from the organization. In the beginning, this may mean creating a basic website on something like WordPress (perhaps linking to a more actively maintained social media site) and adding a second number to your cell phone line.
  • Tax Returns – A nonprofit organization in existence through a fiscal year must file some form of a 990; while acceptance of a 990 EZ is not uncommon, acceptance of the 990 N (“the postcard”) is rare for foundations and should be avoided even if your organization is eligible.
  • Year End Financials – Reconciled year-end financials are common requirements, so expect to produce board approved balance sheets and profit and loss statements. Have your board approve these financials following the close of your current fiscal year.

From Eligible to Competitive

Notice that the list of things needed just to get your foot in the door is already raising the barriers for grant seeking above those of crowdfunding, individual donors, some angel investors, fundraising events, and other start-up revenue sources. To really position your organization strongly, the next layer of recommendations are really, really good to have when grant seeking for startups.

  • Business plan – Nonprofits are also businesses, the main difference being a charitable purpose and that a majority of revenue goes toward supporting programs and projects that seek to make a difference in the world. A good first step is to create a business plan that details how you aim to establish, grow, and support your organization. This includes a detailed budget, cash flow needs, anticipated and secured funding streams and projections, phases of growth (e.g. salaries coming on board, office space, sector specific licensure if applicable), and your overall strategy for pursuing funding. Funding streams include fundraising events, individual donations, earned income (including fee for service contracts), personal investment, small business loans, and of course, grant seeking.
  • Compliance and good standing status with the New Mexico Attorney General’s Office – Charities that solicit contributions in New Mexico are required to annually file documents such as tax returns through the Charitable Organization Registration Online System (NM-COROS). Funders expect organizations to be up-to-date with required filings (or have on-time approved extensions for filing on record). Status on COROS filing is publicly available. Visit the NMAG website to make sure that your organization is in good standing. Funders are not likely to give you money if you are not diligent in other business reporting and filing areas.
  • Independently reviewed or prepared financials – In the state of New Mexico, nonprofit organizations with a gross annual revenue of $500,000 or more must have an audit conducted by an independent CPA. This is also a requirement if your organization is awarded federal grants. A good proportion of foundations will require an audit so it may be worth the time and expense of a CPA to undergo audits prior to hitting the half-million mark. At lower levels, having a third-party accounting firm or an independent CPA conducting your bookkeeping or reviewing annual financials demonstrates good financial practice.
  • Existing investment – Startup grant seeking offers a classic case of needing to have money to make money. While not an absolute, it is far easier to convince a foundation to invest if you have already convinced others to invest and establish some basic funding to ease worries of organizational financial sustainability. This could be personal funds, donations, or financing. Note that many grant makers want to make sure that your board is behind your mission. Oftentimes, a grant application will ask for the percentage of board members contributing to your organization both personally (with their own money) and professionally (through a donation made by their companies).
  • A complete and well-established Guidestar profile – Guidestar is a comprehensive nonprofit database that funders and donors use to check the transparency and legitimacy of a nonprofit organization. Visit Guidestar to check your organization’s profile and upload current information. Read a previous blog article from TGP on charity ratings and how to ensure sure that the information about your organization’s information is being presented favorably.
  • A well-rounded website – In the age of Google, it is important for nonprofits to keep easy to navigate and informative websites. This is the face of your nonprofit. Funders will frequently check out a website to view services and gain a sense of your organization and the work you are doing. Keep websites streamlined, organized, and easily accessible. Post information about your board meetings, finances (or a link to your Guidestar profiles with your annual 990 filings), and other information that promotes transparency into your nonprofit’s management.
  • New Mexico Resident Business or Veteran’s Business Certificate – If you are thinking about seeking state, county, or city government dollars, then a resident or veteran’s business certificate, although not required, will be a helpful tool in gaining funding through automatically awarded preference points – a bonus that can help you score higher over other agencies. You can learn more about these certificates or begin filing for one on the Tax & Rev website.

Grants can be a great way to build capacity, fund a new project, or expand an existing program but it is important to remember that to be successful, you must first establish the building blocks of your nonprofit. Funders want to invest in organizations that are well prepared and have a proven track record of handling money effectively and responsibly. So before you go looking for that perfect fit with a funder, make sure you are offering an idea worth investing in from an organization worth believing in. The upside is that many of these steps are no or low-cost. Further, when agencies have these building blocks in place, it is realistic for startup nonprofits to secure some of the grants they apply for – we know, we have seen it happen!

We hope that this checklist of must-haves before grant seeking is helpful to your fundraising mission. Please contact us if you have questions or suggestions for our list! We would love to hear from you.



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