Q:

What are the advantages and disadvantages of an endowment fund?

A:

Quick Answer

Advantages of an endowment fund include the stability it brings to an organization's finances and the confidence it gives donors that the organization is stable for the long term. The main disadvantage is that a large endowment may cause donors to question an organization's need.

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Full Answer

Endowment funds are accounts set up by nonprofit organizations in which the principal remains untouched but the interest and earnings are used for organizational expenses. Typically, nonprofit organizations are dependent on the continuing goodwill of donors, but the principal in an endowment fund establishes a base to relieve fundraising pressure and fall back on in lean financial times. Endowment funds also give fundraisers the opportunity to solicit large gifts and bequests to ensure the long term stability of the organization. Donors appreciate that the existence of an endowment fund means that the organization is planning for the future and not just surviving in the present.

On the other hand, large endowments may cause donors to become unsympathetic to an organization that they feel already has sufficient funding. Critics may point out the presence of large endowments as available cash when organizations make appeals for funding for specific programs. Organizations must clarify to potential donors the purpose and uses of the endowment and explain that to draw from an endowment's principal to meet immediate needs undermines the financial stability of the organization.

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