Types of Funding Mechanisms
A funding mechanism is an award to provide support a proposed project; this is typically in the form of a grant. There are many types of funding mechanisms. They vary according to purpose and target audience. For the members of HRA, the Grants Administration Community will list the relevant funding mechanisms.
- Grants – Funds granted to a person or organization to support a specific, connected set of activities, with a beginning and an end, explicit objectives and a predetermined cost. Most research funding is through grants. A grant recipient must be a registered 501(c)3 nonprofit organization.
- Endowment Grants – Funds that are given to an organization to be invested to create a source of income for the organization.
- Prize – Given to a person or organization to recognize achievements, including incentive prizes that are awarded after achieving a set of pre-specified goals.
- Contract – A legally binding and enforceable agreement that protects the interests of each organization represented in the contract. In the terms of the contract each organization’s specific obligations will be noted. The contract may be modified or canceled if either party does not meet the specific terms of the arrangement.
- Cooperative Agreement – Similar to a grant with the distinction that it provides for substantial involvement between the funder and the recipient in carrying out the proposed activity.
- Direct Research Support – Support for “intramural” research programs (including HHMI investigators).
- Impact Investment – Funds invested that aim to create positive social impact as well and achieve financial return. They can be classified as a “Mission Related Investment” (MRI) or a “Program Related Investment” (PRI). Despite this similarity, however, each type of investment has very different tax consequences for the investing private foundation. below.
- Mission Related Investment – An MRI, also commonly referred to as an “impact investment,” is broadly defined as a financial investment that also furthers an organization’s mission. Any investment in which the investor intends to generate both a social (including educational or environmental) return as well as a financial return, such that it is not exclusively about profit, could qualify. Despite current common usage, there is no legal definition of an MRI and no legal requirements to qualify for, or prohibitions resulting from, this status. An MRI is not a charitable activity. MRIs are made from investment assets rather than program assets, sometimes referred to as “the other 95 percent” of a private foundation’s assets that are not designated for making charitable qualifying distributions. Because an MRI is a commercial investment, it must be made prudently and satisfy the same investment standards under state and federal law as other investments.
- PRIs – The IRS allows foundations to make loans — called program-related investments (PRIs) — to nonprofits. PRIs are mission-driven investments that are closely akin to charitable grants. Unlike MRIs, an investment is required to meet a specific charitable standard to qualify as a PRI. However, a PRI does not need to be a prudent investment. Private foundations rely on an explicit section in the Internal Revenue Code (the “Code”) that defines a PRI and carves them out of the jeopardizing investment rules that prohibit certain types of risky investments. To qualify as a PRI, an investment must meet a three-part test:
- The primary purpose of the investment must be to further one or more exempt purposes of the foundation.
- The production of income or the appreciation of property may not be a significant purpose of the investment.
- No electioneering and only very limited lobbying purposes may be served by the investment.
- Collaborative – Collaborative research grants provide shared funds and are intended to stimulate cooperative research among individuals or organizations who have a focus on a clearly identified research project.
- Matching Grants – Also known as cost share, these grants require the grantee to raise funds to match a portion or the entirety of the grant provided. The grantee is matching the grant funds with their own funds. Typically, matching grants are intended to provide the impetus for broadening fundraising efforts or in kind capacities within the organization. These grants also provide the funding agency the ability to scale the funding.
- Cash match – The most common type of match, and the easiest to track, is cash match. Cash match is either the grantee organization’s own funds (general revenue) or cash donations from third parties (i.e. partner organizations), or by other grants. A cash match contribution is an actual cash contribution.
- In-kind match – In-kind match contributions come from the grantee organization. In-kind match is typically in the form of the value of personnel, goods, and services, including direct and indirect costs. Third party in-kind match contributions come from other third parties. Third party in-kind match contributions come in the form of the value of personnel, goods, and services (including direct and indirect costs). Grantees and third parties simply need to document the contributed resource of value.