The charity and not-for-profit sector is not immune to the effects of the economic downturn. If fact, it is widely argued that the “Third Sector” is the hardest hit sector and will take the longest to recover. With government spending cut back, businesses reducing expenditure (and suffering from funding shortages themselves), and many individuals suffering from reduced disposable income, charities and not-for-profit organisations are fighting for every penny available. So what can be done?

There are several sources of finance available to businesses other than traditional high street bank lending, and individuals have benefited from the emergence of pay-day lenders to provide short-term sources of finance.

But what about charities and not-for-profit organisations? There is a temptation to push ever harder at getting donations, whether through the use of “chuggers” to attract new donors or aggressively targeting increased donations from existing donors.

High net worth individuals are an ever more attractive option, given the gift aid relief available to individuals and charities and the recent scrapping of the government’s proposed cap on tax reliefs to individuals, as well as a reduction in the Inheritance Tax rate to 36% for individuals leaving at least 10% of their estate to charity.

Organisations may also look at more frequent fundraising events, or try to generate additional trading profits, such as through price increases.

However, push too hard and there is a risk that goodwill towards a charity fades and people become more reluctant to donate. This loss of goodwill can be just as detrimental to a charity, and can impact upon longer term funding.

Given the reduced availability of funding, the not-for-profit sector needs to be just as flexible as commercial organisations in finding alternative sources of funding to those traditionally available, whilst maintaining goodwill and encouraging people to want to get involved. So, is there an option that ticks both boxes?

Well one such option is crowdfunding. This is an ever growing and increasingly popular way for charities to seek funding for their charitable activities. In fact, the popularity and success of crowdfunding for charities has led to the model being adapted for use by commercial entities.

Crowdfunding is the concept of many individuals contributing usually small amounts of money to a project or cause they believe in. It allows charities and not-for-profit organisations to seek both financial and non-financial resources from individuals and is designed to attract people to contribute because of the project or cause rather than any tax or other benefits available.

There are various crowdfunding websites (such as peoplefund.it, startsomegood.com, kickstart.org and pleasefund.us) where organisations list a project they are running. They detail the purpose of the project, the level of funding required and what the funding will be used for. The individuals then make a donation towards this project.

The increased use of social media and awareness of social responsibility has led to crowdfunding being an ever more popular option for charities, and in particular smaller charities, to attract funding. But it can bring other benefits – it provides an opportunity for charities to engage with individuals and the local community, and provide information regarding its activities. This helps to promote the charity and its objectives, and may attract other benefits in addition to funding, such as publicity and attracting new volunteers – both as important to a charity as finance.