Managing Pledges in Nonprofit Capital Projects

Introduction

A pledge is a formal commitment made by a donor to contribute a specified amount of money to a nonprofit, typically paid over a set period of time, often 3 to 5 years. 

Pledges are a critical fundraising tool for nonprofits, particularly in large capital projects. While they provide essential commitments for funding, they come with risks. As pledges may be promised over several years, nonprofits must carefully manage their finances to avoid cash flow issues and potential financial strain. 

Capital Project Pledges: Managing Risk and Timing

Pledges are a crucial part of fundraising for major capital projects, but they must be handled with caution. When a pledge is made, nonprofits are required to book the pledge as revenue, which can give the impression that the organization has more funds than it actually does. The challenge lies in the fact that pledges are typically fulfilled over a period of 3-5 years, meaning cash isn’t immediately in hand. This discrepancy between pledged amounts and actual cash flow can create significant financial challenges if not managed properly.

Don’t Spend What You Don’t Have

One of the fundamental principles of good fiscal responsibility is to not spend money before it’s in hand. Even though pledges represent future revenue, relying on them prematurely can lead to financial strain. For example, a nonprofit may plan a major construction project based on the total amount of pledged funds, only to find itself short of cash in the middle of the project. This can force the organization to take out loans to cover immediate expenses, adding interest payments and financial pressure.

Moreover, if financial markets decline or donors experience personal financial difficulties, the organization may face delayed or defaulted pledge payments, compounding the cash flow problem. In most cases, a pledge is not legally binding, meaning the donor is not legally obligated to fulfill it. Even if a formal donor agreement is in place, nonprofits often choose not to pursue legal action to enforce payment, as doing so could harm donor relationships and expose the organization to reputational risk.

The Chicago Botanic Garden Approach

When Sophia Shaw was CEO of the Chicago Botanic Garden, the organization made the strategic decision that projects would not be financed with additional bond issues or by borrowing, as the Garden already had $50 million of tax-exempt bonds outstanding, with $1.6 million in annual debt service. Given this significant debt service burden, the Garden did not have the financial capacity to absorb additional debt service expenses.

Bonds were also subject to a bank debt covenant, which required the Garden to maintain a specified percentage of the total debt in unrestricted cash, investments, and pledges. Taking on additional debt could have jeopardized the Garden’s ability to meet that covenant. As a result, we decided that capital project construction would only begin when sufficient cash or very short-term pledges were in hand to fund construction costs as they were incurred.

This extremely prudent method allowed the Garden to build trust with donors, who appreciated the financial discipline. As a result, donors felt confident that their contributions were being managed responsibly, and many gave even more. Thanks to this approach, projects were fully realized without the need for additional borrowing.

Solutions for Managing Pledges

To navigate the complexities of pledges effectively, nonprofits should implement several strategies:

1. Conservative Financial Planning

Nonprofits should adopt a conservative approach when planning capital projects based on pledges. It’s important to only commit to spending based on cash in hand, not future pledges. This conservative approach helps reduce the risk of overcommitting to expenses that the organization may not be able to cover if pledges don’t materialize as expected.

2. Building Donor Confidence Through Transparency

Transparency is key to managing both donor relationships and pledges. By clearly communicating how pledged funds will be used and providing regular updates, nonprofits can build donor confidence. This not only reassures current donors but also encourages future contributions.

Additionally, setting clear expectations with donors about pledge payment timelines and emphasizing the importance of their commitment helps manage the flow of funds and ensures that the nonprofit can plan its projects and operations effectively.

3. Use of Bridge Financing

In some cases, bridge financing may be necessary to cover the gap between when pledges are made and when the cash is received. Nonprofits may need to take out short-term loans to fund urgent capital needs, but this approach should be used cautiously. Interest payments on loans can increase the financial burden, and the organization must be certain that the pledged funds will arrive on time to cover these costs. When considering bridge financing, it’s essential to have a solid contingency plan in place to cover potential delays or shortfalls in pledged payments.

4. Diversifying Income Streams

As with all aspects of nonprofit finance, revenue diversification is key to mitigating the risks associated with pledges. By ensuring that the organization has other reliable income streams—such as grants, earned income, or donations from smaller fundraising campaigns—the nonprofit is better positioned to handle any disruptions in pledged funds.

The Importance of Careful Pledge Management

Effective pledge management is not only about securing future funding—it’s about ensuring that the organization remains financially stable while awaiting those funds. Poorly managed pledges can lead to cash flow crises, delayed projects, or even damage to the organization’s reputation if obligations cannot be met.

Final Thoughts

By following conservative financial practices, maintaining clear communication with donors, and exploring options like bridge financing when necessary, nonprofits can maximize the benefits of pledges while minimizing the risks. Ultimately, it’s about balancing ambition with caution to ensure that the organization remains financially strong and mission-driven.