What Is a Restricted Grant?
A restricted grant is funding that must be used for a specific purpose set by the funder.
That restriction might apply to:
A particular program
A specific project
Certain expenses
A geographic area
A defined group of people
A specific time period
Equipment or capital purchases
Activities listed in the approved grant proposal
If a foundation awards your nonprofit $50,000 specifically to run a youth literacy program, you generally cannot decide three months later that the office desperately needs new furniture and use the remaining grant money for that instead.
The money came with instructions. Those instructions matter.
What Is an Unrestricted Grant?
An unrestricted grant gives the nonprofit much more flexibility over how the funds are used. You may also hear this called general operating support. Instead of funding one narrowly defined program, unrestricted funding can often support the organization as a whole.
That may include expenses such as:
Salaries
Rent
Software
Insurance
Accounting
Administrative costs
Technology
Fundraising
Training
Program expenses
Other operating needs
This kind of funding can be especially valuable because nonprofits do, in fact, require electricity, bookkeeping, staff, systems, and all the other deeply glamorous things required to keep an organization functioning.
Programs do not magically operate in a vacuum.
Restricted Does Not Mean Bad
Restricted funding gets a bad reputation sometimes because it gives the organization less flexibility. But restricted grants can still be extremely useful. A funder may provide substantial support for a program your nonprofit already intends to run.
If the grant covers staffing, supplies, program delivery, evaluation, and related costs, that restriction may fit your plans perfectly.
The problem starts when organizations chase restricted money simply because it is available.
A $100,000 grant is not automatically a good opportunity if accepting it requires you to launch a program you were never planning to run, hire people you cannot support later, or spend another $40,000 of your own money to meet the requirements.
The amount of the grant is only part of the decision.
Restrictions Can Be Very Specific
Do not assume “restricted” simply means “use this for the program.” A grant agreement may say that funding can only be spent on certain categories.
For example:
Allowed:
Program coordinator salary
Participant materials
Transportation
Evaluation costs
Not allowed:
Fundraising expenses
General administrative salaries
Office equipment
Expenses incurred before the grant period
Another grant may allow administrative costs but cap them at a certain percentage. Another may require approval before moving money between budget categories. Another may require all funds to be spent by a specific date.
This is why someone needs to read the actual award terms before the money starts moving.
Your Proposal Can Create Restrictions Too
This is something that surprise anyone who runs an organization.
Restrictions do not always appear only in a dramatic section titled called RESTRICTIONS. The approved proposal, budget, award letter, or grant agreement may all become part of the terms governing how the money is used.
If your proposal says:
$20,000 will fund two part-time program coordinators.
you should not assume you can quietly move that $20,000 to marketing later because the grant agreement does not specifically mention coordinators on page one. The safest approach is to treat the approved budget and grant documents as one package. If circumstances change, ask the funder before reallocating restricted funds.
Why Unrestricted Funding Is So Valuable
Imagine your nonprofit receives $75,000 for a new community program. Excellent!
But the organization also needs:
Someone to manage payroll
Software to track participants
A bookkeeper
Insurance
Internet
Staff training
A functioning laptop that does not sound like it is preparing for takeoff
Those costs may support the program indirectly, but a restricted grant may not cover all of them. Unrestricted funding gives leadership the ability to put money where the organization actually needs it.
That flexibility can help with capacity, staffing stability, infrastructure, and costs that are difficult to attach neatly to one program.
Can Restricted Funds Pay for Staff?
Sometimes.
This is one of those questions where the correct answer is not automatically yes or no. If the grant budget includes personnel expenses, then salaries or wages connected to the funded program may be allowable.
For example:
A grant funds an after-school program and includes:
$30,000 for a program manager
$10,000 for instructors
$5,000 for supplies
Those personnel costs are part of the restricted grant. But that does not automatically mean the organization can use the same grant to cover the executive director's full salary, unrelated administrative staff, or employees working on completely different programs.
Check the approved budget and grant terms.
What Happens If You Do Not Spend All the Restricted Money?
Again, check the agreement.
Depending on the funder and terms, your nonprofit may need to:
Return unused funds
Request permission to extend the grant period
Request approval to reallocate the remaining balance
Carry the funds forward under specific conditions
Do not wait until the final reporting deadline to discover there is $18,000 sitting untouched. Track spending throughout the grant period.
Restricted vs Unrestricted: A Simple Example
Your nonprofit receives two $25,000 grants.
Grant A
The funder says:
Use this funding to provide 500 meals to families in County A between January and June.
That is restricted funding. You need to use the grant for that purpose and within the agreed terms.
Grant B
The funder says:
This award provides general operating support for your organization.
That is unrestricted funding. Your nonprofit has much more discretion over where the money is needed.
Same amount. Very different flexibility.
What Should You Check Before Accepting a Restricted Grant?
Before signing the agreement, confirm:
What can the money pay for?
Read the allowable expenses.
What cannot it pay for?
Look for excluded or unallowable costs.
When can the money be spent?
Check the grant period.
Can the budget be changed?
Find out whether reallocations require approval.
Are matching funds required?
Some grants require the nonprofit to contribute money or secure additional funding.
What reporting is required?
Check financial and program reporting obligations.
What happens to unused funds?
Do not assume you can keep them.
Can your organization actually manage the grant?
A grant can bring money and a surprising amount of administration along with it. Make sure somebody can handle the tracking, documentation, reporting, and deadlines.
Track Restricted Funds Separately
Your accounting system should make it possible to see how restricted grant funds are being used. Your program team should also know what the grant covers. Do not make the finance person the only human being who knows that a particular expense is prohibited.
A basic internal grant record should include:
Funder
Award amount
Grant purpose
Grant period
Approved budget
Restrictions
Reporting dates
Spending to date
Remaining balance
Required approvals
Grant contact
This gets especially important once your nonprofit manages several grants at the same time. Otherwise you eventually reach the thrilling stage where three people are staring at an invoice asking: “Which grant are we paying this from?”
The Best Funding Mix Usually Includes Both
Restricted grants can fund programs and projects. Unrestricted funding helps the organization stay capable of delivering them.
A healthy funding strategy should pay attention to both. If nearly every dollar your nonprofit receives is restricted to programs, the organization can end up well funded on paper while struggling to cover the infrastructure supporting those programs.
So when unrestricted funding is available, do not treat it as the less exciting cousin of the big program grant.
It may be some of the most useful money your nonprofit receives.
Before You Spend the Grant
Read the award letter. Read the approved budget. Read the grant agreement. Then make sure the people actually spending the money understand what those documents say.
Because “we assumed it was allowed” is a very uncomfortable sentence to use in a grant report.
More Resources for Nonprofits
RAEFORM publishes practical nonprofit resources covering grant readiness, funding research, operations, documentation, systems, and the administrative work that keeps programs running properly.