What is a Restricted Fund?

A restricted fund is used by a nonprofit entity to store funds that have a limited use, as per the requirements of donors. An example of a restricted fund is an endowment, where the principal is only to be used to generate investment income, and the uses to which the income can be put may also be restricted.

Advantages of a Restricted Fund

Restricted funds are preferred by many donors, since they can be used to ensure that donations are directed as desired by the donors. These funds are especially useful when the amounts being donated are quite large; these are the situations in which donors are most interested in ensuring that their donations are put to a specific use.

Disadvantages of a Restricted Fund

Nonprofit entities prefer to not use restricted funds, since donations shifted into these funds cannot be used to pay for general operations. This can be a major concern when the bulk of all donations are being slotted into restricted funds, leaving an organization short of cash to run its administrative and fund raising activities.

The Difference Between Restricted and Unrestricted Funds

Restricted funds are used to store cash for which donors have mandated a restricted use. This is not the case for unrestricted funds, which have been given to the organization with no restrictions on their use. Unrestricted funds are the most sought-after by nonprofits, since they can direct these funds toward whatever needs the management team feels are the most important at the moment.

As an example, a donor provides a $5 million gift to a nonprofit, which is restricted for the support of an exhibit on Native American art forms. Meanwhile, another donor contributes $100,000 of unrestricted funds, which the nonprofit can use to pay for salaries, the utility bill, necessary building repairs, and so forth.