Emergency funding 101Emergency funding is the cash you need to weather a crisis, when all regular sources of income are depleted or unavailable. Emergency funding is intended for a true emergency, whether you're drawing on your own reserves, seeking additional funds from donors or applying for an emergency grant or loan.
The need for emergency funding should raise some key questions for nonprofits — and initiate some serious self-assessment. Is the emergency a true one-time crisis, or is it a symptom of an organizational failure or lack of sustainability? What are the steps for recovery after the immediate need has been addressed?
Types of emergencies
The emergencies that nonprofits experience typically fall into one of the following categories:
- Internal emergency. An internal emergency is often the result of interrupted or failed cash flow or an unexpected expense. Cash flow interruptions might occur if a funding source is lost, while additional expenses might be the result of an equipment failure or facility repair.
- Unforeseen event. An unforeseen event is something extreme, such as an earthquake or other natural disaster. Buildings or facilities might be destroyed or uninhabitable, and yet the need for services might increase.
Sources of emergency funding
You might consider various sources of emergency funding. For example:
Your own reserves
Emergencies are the primary reason for an operating reserve in the budget. This reserve can be used to continue services in the event of an internal emergency or unforeseen event.
A common guideline is to have adequate operating reserves to cover three to six months of expenses — although your organization's specific needs might call for more or less. Keep in mind that operating reserves aren't intended to cover income shortfalls. In addition, the plan for using operating reserves should also include a plan for replenishing those reserves as soon as possible.
Emergency grants or loans
Various foundations offer emergency grants or loans specifically earmarked for nonprofits experiencing financial difficulties. Sometimes, these funds are referred to as "bridge" or "gap" funds. Emergency grants or loans might also have specific restrictions, such as paying rent or covering facilities costs. In other cases, an emergency grant or loan request might need to specify how the funding will be used.
The foundations that offer these grants or loans may offer — or require — financial education or coaching to address the root causes of the shortfall.
Additional options for emergency funding may include:
- Emergency fundraising campaigns. These campaigns call on current donors and their networks to make an additional gift to help the organization through a particular moment of crisis.
- Grant funds not yet paid out. Imagine you have an emergency in year one of a three-year grant. You might request conversion to a two-year grant, allowing you to draw 150 percent of the annual grant in each of the two years.
- Restricted funds. While restricted funds aren't eligible for typical operating expenses, you might make a one-time appeal to a specific donor to release restrictions in an emergency.
- Organizational assets. For a fee, you might consider offering "back office" services to other nonprofits or consulting with other organizations that would benefit from your expertise. As another option, you might sell selected pieces of intellectual property.
- Bank loans or lines of credit. These should be considered as a last resort, and only if you're certain that your organization will be able to pay off the debt.
However you manage a financial emergency, be sure to show gratitude to your donors early and often — and to communicate openly to maintain public confidence in your nonprofit's work. Looking ahead, consider the emergency an opportunity to evaluate your practices and bolster long-term financial sustainability.