Essential guide to financing your community organisation

Financing is a priority for almost every community organisation. The more money you can raise, the more you can achieve - but competition is fierce for the limited amounts of funding that are available.

A well-planned approach to financing will help you to identify what types of financing are most suitable for your organisation. As well as grants, donations and sponsorship, your options may include generating your own income, borrowing or even attracting investment.

Financial planning

Grants for community organisations

Support from individuals

Business sponsorship and donations

Trading income

Loans and investment finance

1. Financial planning

Establish your community organisation's objectives

• Break down your overall objectives into shorter term priorities and goals.
• Aim to identify the most important projects you want to carry out, and the financing you need for each one.

Think about the different types of financing that may be available

• Many organisations have opportunities to generate income - for example, by charging for services - rather than relying entirely on donations.
• A mix of different sources of financing is usually a better option than relying too heavily on one particular kind.

Get help from support agencies and other organisations

• Local support agencies can work with you to identify and approach potential sources of funding.
• Ask similar organisations what has worked for them.

Work out how you will approach raising the finance

• Be aware that raising finance can itself cost money and involve financial risk. For example, an unsuccessful fundraising campaign could raise less money than you spend on it.
• Decide who will be responsible, what your timescales are and how much time, money and effort you are prepared to invest.
• Trying to gradually increase your financing can be less risky than trying to raise too much money too quickly.

Make sure you have the right legal structure and constitution

• There are many types of community or not-for-profit organisations: social firms, community interest companies, credit unions, housing associations, co-operatives, development trusts, charities and their trading arms, and registered societies.
• The rules for your organisation structure may not allow certain types of financing. For example, many organisations are not allowed to borrow, and some must use their profits in the community and not distribute them to company members.
• Your legal structure can have tax implications. For example, charities benefit from tax breaks such as Gift Aid. Depending on their sources of income, most not-for-profits can generally arrange some tax exemptions (except on unearned income).
• If you think you may need to change your legal structure, take expert advice.

2. Grants for community organisations

Find out what the public sector can offer

• Local councils often offer support for organisations that help improve the local community. Different councils will have their own schemes and local priorities.
• Central government departments may offer funding support for organisations offering relevant services.

Investigate charitable donors

• The National Lottery offers significant funding programmes including support for community organisations.
• A wide range of charitable trusts support organisations matching their particular interests. An application for funding is most likely to be successful if you have a connection with the trust.

Check individual programme details

• Each grant scheme will have its own rules, setting out what kinds of organisations (eg registered charities only) and activities it is prepared to fund and what size of grant it makes.
• Most grant givers will only fund specific projects rather than your general running costs, though there are exceptions.
• Many grant schemes will only cover a proportion of a project's costs. You have to provide match funding (where you match the grant with the organisation's own funds) from other sources or your own resources.
• Many schemes have deadlines. Some public-sector schemes tend to run out of funds towards the end of the financial year.

Decide whether to apply

• Application procedures can be bureaucratic and drawn out. Even if you are successful, it could take months to receive the funds.
• You may want to get help from another community organisation that has made a successful application.
• You can use a professional fundraiser. Check their charges and reputation carefully before committing yourself.

Make contact with any schemes you are interested in

• A telephone conversation can quickly help you understand whether you are eligible, what your chances of success are and what will be involved.

Make an effective application

• The grant-giver will specify what information they require, often using their own application form.
• The giver will want to know what their funding will allow you to achieve and how the work will be monitored. Measurable outcomes are preferable to vague aims.
• Demonstrating competence - such as a strong management team - tends to be important, particularly for larger amounts.

Build your relationship

• Ask for feedback on your application.
• Once you have been awarded a grant, keep the funder informed on the progress of your project.
• Keep in touch afterwards, improving your chances of future funding.

3. Support from individuals

Identify groups of individuals that might support your organisation

• People who are likely to benefit from what your organisation does may be natural supporters.

Decide how you will approach them

• Word of mouth and personal contact can be the most effective method. Note that street collections and public lotteries must be licensed by the local authority.
• Free local publicity can help raise your profile. Consider contacting local papers and radio stations to let them know what you are doing, particularly if it is somehow newsworthy or interesting to their audience.
• Paid advertising is an option but tends not to be very cost-effective for community organisations.

Make a compelling case why the grant-giver should support you

• Stress how what you do improves the community and the lives of local people. Give examples of how you can use different amounts of money.
• Highlight the difference their money will make and give details of success stories. If you can reclaim tax under Gift Aid, explain how their money will go further.

Consider holding a fundraising event rather than just asking for donations

• A fundraising event can highlight what your organisation does (for example, by getting supporters to visit your premises). Personally invite grant-givers and companies that support you.
• Plan the event carefully. What will the event be? Who will be in charge of making it happen? How will you publicise it? What is the budget for the event?
• Make sure you comply with any regulations. Contact your local authority to check whether the event needs authorising with a 'temporary event notice'.
• Some fundraising events and sales are VAT-free if you run a charity.

Aim for a long-term relationship with your supporters

• Some community organisations naturally suit membership schemes. For example, a local sports club.
• A 'supporters club' can be a way of building a lasting relationship with supporters. If your scheme offers concrete benefits, any income you raise may count as trading income rather than a donation for tax purposes.
• Publish a newsletter, or at least contact all your supporters at least once a year.

4. Business sponsorship and donations

Identify local businesses that might be supporters

• Businesses often support organisations that have a link to what they do or that can help raise their profile with their customers.
• Businesses are often prepared to support organisations nominated by an employee (or supported by the owners or managers of the business).
• Local offices of larger companies often support community involvement as part of their 'corporate social responsibility' programs.
• Local voluntary organisations that support your aims may be prepared to make a donation or fundraise on your behalf.
• Avoid businesses that might harm the reputation of your organisation.

Think about what kind of support to ask for

• A straightforward cash donation may be the most attractive for you. The business making the donation may benefit from good publicity for doing so.
• You can agree a sponsorship deal, where the business gets agreed benefits. For example, you might advertise their support (eg in your newsletter), give them free tickets to events, or allow them to advertise your endorsement of their product or service.
• The business could provide 'support in kind' - such as free products or office space - or give employees paid time off to help you out.
• The business could link up with you in their marketing. For example, agreeing to donate £1 for every product sold in the next month (and then advertising this to help increase sales).
• You could ask the business to promote your organisation to their employees (for example, setting up a payroll giving scheme for your benefit) or to other businesses they know.

Make sure you understand the tax implications of different kinds of support

• Businesses can get tax relief on outright donations to charity, but not on sponsorship where they receive something in return (eg advertising).
• Any donations you receive are tax free.
• Sponsorship counts as trading income, and may be subject to corporation tax.

Approach the right individual

• Phone up to find out who deals with this sort of thing, and then write to him or her by name.
• Explain what you do, why it is relevant to their business, what you are asking for and how they can benefit. As well as good publicity, supporting a community organisation can improve employee motivation and boost sales.

Agree the deal

• Unless you are simply receiving a donation, make sure you have a clear written agreement setting out exactly what you have agreed.

5. Trading income

Consider whether trading should be part of your core purpose

• An organisation that provides a service to the community might decide to charge for it rather than offer it for free, so that you can do more. For example, a village hall might charge a small letting fee to organisations using it.
• Membership organisations often charge members for products and services. For example, a local sports club might charge a court-booking fee and have a bar selling drinks.

Consider whether you might be able to sell your services to the public sector

• For example, an organisation that helps care for the elderly might ask the local authority for funding.
• Public-sector organisations often prefer to fund community organisations to deliver services, rather than making outright grants.
• You will need to demonstrate that their money will be well spent. It may take time to build your reputation and develop a relationship.
• Any agreement will need to be covered by a clear contract.

Make sure you have got your tax affairs sorted out

• Some trading activities are exempt from tax. For example, a charity that trades as part of its primary purpose (eg delivering services to the elderly) is not taxed on that income.
• A charity that has substantial trading outside its primary purpose (eg for fundraising) may need to set up a separate trading subsidiary. Take advice from an accountant.
• Members' clubs are not generally taxed on supplying services to their members, but are subject to tax on trading with the public.
• Trading activities may be subject to VAT, if your total trading income exceeds the threshold (£90,000 from 1 April 2024).

6. Loans and investment finance

Consider whether your organisation should be able to borrow money

• Many community organisations are prohibited from borrowing by their own constitutions, though these can be changed.
• Borrowing money (and paying interest on the loan) is normally only suitable for organisations that expect to be able to use the loan to generate income. For example, if the loan will help you increase your trading income.
• Borrowing can be risky. If the organisation cannot repay a loan, you might have to sell assets or wind up the organisation altogether. If you give a personal guarantee for a loan, your own assets could be at risk.

Consider whether you want to be able to raise investment finance

• Only special legal structures can raise investment finance. For example, a community investment company (CIC) has a structure similar to a normal company, but limits on the returns investors can earn.
• Legal structures like this offer more flexibility than charities and other traditional forms of voluntary organisation, but do not benefit from the same tax advantages.
• There can be a conflict of interest between investors (who typically want to earn a return on their investment) and the goals of the organisation. CICs are sometimes set up by entrepreneurs who want to give something back to the community.

Identify sources of funding

• Many community organisations seeking investment finance receive it from an individual (often the organisation's founder) who wants to be involved with the organisation.
• Loan finance may be available from supporters or from the bank. You will need to show that you can afford to make interest payments and repay the loan.
• Specialist responsible finance providers can also provide funding.