When setting out to build organizational capacity, one of the first challenges nonprofit leaders face is how to pay for it. In the long run, added capacity often pays for itself—whether through greater impact, efficiency, or direct fundraising capacity. But in the immediate term, there’s still the matter of finding those critical initial resources.

One of the best places to start is through grant funding.

While project-focused grant funding has traditionally been part of creating a “nonprofit starvation cycle,” grant makers’ awareness of the value of capacity-building support is finally starting to shift. But it’s up to organizations to seize these new opportunities.

 

The Nonprofit Starvation Cycle

Over the last decades, too many nonprofits have been locked in what’s known as the “nonprofit starvation cycle.” This happens when donors focus only on funding direct program costs and severely restrict funding for “overhead.”

Whether it’s government grants, individual donors, or foundation grants, for too long the idea of “low overhead” and project-based funding has forced nonprofits to underestimate and underfund the true cost of delivering programs. According to Bridgespan:

Over half of the 15 largest US foundations have a flat-rate indirect-cost reimbursement policy of 15 percent or less. Rigorous research confirms that grantees’ actual indirect costs nearly always exceed these allocations. In a 2015 Bridgespan study of a large foundation’s grantees, for instance, indirect costs ranged from 21 percent to 89 percent of direct program costs.

Starved of resources to support operating costs, nonprofits struggle to “make do” or develop complex ways to embed a portion of operating costs in project budgets, such as through allocation formulas. But things are finally changing.

 

Funders Are Learning the Value of Capacity Building

Foundation funders especially are finally shifting their thinking about supporting grantee operations and capacity building. According to research from the Center for Effective Philanthropy:

• 32% of foundation leaders say their foundation provides general operating support to the majority of grantees.
• 18% of foundation leaders say their foundation provides capacity-building or organizational effectiveness grants to the majority of grantees.
• 29% of foundation leaders say their foundation provides assistance beyond the grant to the majority of grantees.

 

Even better, 44% of foundation leaders reported looking for ways to expand and strengthen their flexible and/or capacity-building support.

But for grantees, there’s no time to wait around for foundations to offer capacity-building support. It’s imperative for nonprofits to start asking more directly. Indeed, a 2022 field scan from the Hewlett Foundation found that:

One of the main reasons foundations made capacity-building investments was because grantees asked.

 

Ready to Learn How to Leverage Grants to Build Capacity?

Whether it’s through matching grants, unrestricted general support grants, or capacity-building grants, learning to leverage foundation funding for capacity-building can make a major difference in your nonprofit’s long-term success.

If you’re ready to start securing funding for capacity-building, join Funding for Good’s December 2023 webinar, Understanding and Maximizing Capacity-Building Grants.