How to Build Credibility on Your Grant Application When You’re a New Nonprofit

If your organization is a new nonprofit, you can increase your chances of winning a grant award by applying through a fiscal sponsor. A fiscal sponsor is usually a veteran agency with a long and successful track record in winning and managing grants; of course, the sponsor must have 501(c)(3) nonprofit status awarded by the IRS.

The role of a fiscal sponsor is to act as an umbrella organization for newer nonprofit organizations that have little or no experience in winning and managing grant awards. Your new organization is the grant applicant, and the established agency is the fiscal sponsor. It acts as the fiduciary (financial) agent for your grant monies. In other words, your fiscal sponsor is responsible for depositing the monies in a separate account and for creating procedures for your organization to access the grant monies.

Why would you use a fiscal sponsor instead of applying directly for grant funds yourself? Because some foundations and corporate givers don’t award grant monies to nonprofit organizations that haven’t completed the IRS advanced ruling period — typically a 36-month time frame during which the IRS is monitoring your nonprofit-related activities and finances to make sure you’re fulfilling the mission, purpose, and activities stated on your nonprofit status application (Form 1023).

No funder wants to award substantial grant monies (more than $10,000) to a nonprofit in the advanced ruling period. Note: Government agencies don’t have advanced ruling period–related requirements.

When selecting a fiscal sponsor, do the following:

• Find a well-established nonprofit organization with a successful track record in financial management.
• Ask your local banker to make a recommendation for a suitable fiscal sponsor.
• Look for community-based foundations set up to act as umbrella management structures for new and struggling nonprofit organizations.
• Choose a sponsor you’re on good terms with and one you have open lines of communication with. Otherwise, your grant monies may be slow in trickling down.

Creating a written agreement between you and your fiscal sponsor regarding how you’ll use and access the money is essential to prevent any misunderstandings.

When it comes to your relationship with your fiscal sponsor, keep the following points in mind:

• The fiscal sponsor is responsible if your organization mismanages the money.
• The fiscal sponsor is responsible if the fiscal sponsor mismanages the money.
• If an audit for financial expenditures is in order, the funding source can audit the fiscal sponsor, and the fiscal sponsor can audit your organization.

Sometimes a fiscal sponsor wants you to include expenses for accounting services or grant management in the Other section of your budget summary and in the budget detail narrative. This practice is acceptable to funding sources.

If your fiscal sponsor indicates that it will provide the fiscal management services at no cost, mention this point at the end of your budget detail narrative. Also present the fact upfront, in the grant applicant credibility section of the narrative.The following is an example introduction of an organization that plans to use a fiscal sponsor:

The Ready for the World Future Forward Initiative (RWFFI) will use the Entertainment Industry Foundation as its fiscal sponsor. Although our organization is a recognized nonprofit organization in the state of Wonderland and approved by the IRS for nonprofit tax-exempt status, the RWFFI has never managed a grant in excess of $1,000,000.

Our board’s executive committee has met with the financial manager at the Entertainment Industry Foundation and has obtained a written fiscal agent agreement. For this request, the grant applicant is RWFFI; however, the fiscal agent will be the Entertainment Industry Foundation. We have attached a profile of the foundation as well as its signed fiscal agent agreement. IRS letters of nonprofit determination for both organizations are attached.