What Is Non-Dilutive Funding?

Business Guides

Jacques Famy Jr
Review By Todd Millman

“Andreessen Horowitz’s legendary US VC fund a16z backs women-led game studio Lumi Interactive in a US$9.76 million seed round!”

Headlines like this one make it look like startups are getting millions in funding from venture capitalists and angel investors all the time. But this isn’t true. Less than 1% of U.S. companies have used funding from venture capitalists.

If you’re starting a new company, hearing about multi-million dollar funding deals might suggest that this type of funding is incredibly beneficial for business. But the truth is that this type of funding — known as equity financing — has strings attached.

It involves giving up some of your equity, which means that investors get a share of your company. They may even get majority control, reaping the bulk of your company's future revenues.

But there are ways to raise funds for your startup without giving up your equity. One way is through non-dilutive funding. Let’s examine what non-dilutive funding is and how you can get it.

Understanding Non-Dilutive Funding

Non-dilutive funding refers to capital a business owner receives, but the funding process doesn't require them to give up any ownership. It includes loans, grants, tax credits, and crowdfunding.

When you use this type of funding, you’re not obligated to sell shares in your company in exchange for startup funds. Essentially, receiving non-dilutive funds won’t force you to “dilute” the amount of control you have over your business. 

However, there might be other requirements that do not relate to ownership, such as reporting requirements and oversight, that you still have to adhere to.

But the trade-off might be worthwhile for some businesses that don’t want to give up any ownership of the company — as with venture capital funding or other types of equity financing. Non-dilutive capital is a good option for early startups that don’t want to hand decision-making power over to investors. 

two people sitting during day

Image Source

Non-dilutive funding is crucial for small startup founders that need seed money to grow their businesses. They can fund marketing efforts, hire new people, buy new equipment, and more without worrying about having to attract venture capitalists or angel investors or giving up equity. 

A great example of non-dilutive funding is the Small Business Administration's Paycheck Protection Program (PPP), which was designed to help businesses withstand and overcome the stress that Covid-19 brought. 

Businesses were able to apply for two rounds of funding in the form of a low-interest loan. They could also make a case for loan forgiveness if at least 60% of it was used for payroll reasons.

Who Provides Non-Dilutive Funding?

Businesses can apply for non-dilutive funding from a variety of sources, including:

  • The Small Business Administration (SBA)
  • The Small Business Innovation Research (SBIR) program
  • Your state’s economic development agency
  • Other governmental assistance programs
  • Non-governmental agencies
  • Private donors
  • Tax credit programs
  • Grants and competitions
  • Vouchers

Financial help from family and friends is also a type of non-dilutive funding that startups use to get their business off the ground. 

Types of Non-Dilutive Funding

Non-dilutive funding is often the best financing option for small businesses and early startups that don’t have the resources to attract angel investors or the size to appeal to venture capitalists.

But non-dilutive financing can take many forms. There are differences in sources, ways of procuring the money — such as quarterly or upfront payments — and repayment conditions.

The most common type of non-dilutive funding is a loan — you apply for financing with or without collateral, and the lender decides if your business qualifies for the loan.

But getting a large enough business loan as a startup can be difficult, so let's look at some of the other non-dilutive funding options and what you can expect if you apply for them.

Grants

Grants are financial awards that come from governmental or non-governmental agencies. These agencies announce grant programs. Then, businesses that qualify can send proposals that outline how they would spend the money if they got it and why their business should receive it.

How It Helps

The businesses selected for grant awards get regular payments for the grant duration. They can use the money to work toward achieving the goals specified in the proposal.

Small-seed grants are intended to help businesses with product development, marketing efforts, clinical trials, day-to-day operations, and other needs. Businesses can specify any goal in their proposals that aligns with the grant application requirements.

Potential Drawbacks

While grants can be beneficial, they are also highly competitive. Additionally, grants are usually monitored, so winning businesses have to report to the grant agency on their progress, and they can be penalized if they don't use the money to work toward their stated milestones.

Crowdfunding

Crowdfunding is a way to raise funds by asking a large number of people for a small amount of money — you’re essentially raising money by reaching out to a “crowd” of people.

How It Helps 

This type of funding is useful for startups that have an early-stage product or idea, and they need non-dilutive funds for product development, marketing, or buying equipment to start production.

Potential Drawbacks

Although some startups get a strong start with crowdfunding, few are able to amass a significant amount of funds. That’s why it’s often used to supplement other types of financing. 

Tax Credits

Tax credits reduce the amount of tax your business owes, but they can also come as a refund. Refundable tax credits allow businesses to get a refund after paying all owed taxes, while non-refundable tax credits are applied to the income tax owed but don’t come with a refund.

How It Helps

Refundable tax credits can contribute to a business's day-to-day operations or be used to fund small initiatives or projects.

Potential Drawbacks

The downside to a tax credit is that your business might not receive that much money in refunds. Also, as tax rules change all the time, you can’t count on receiving a certain amount in tax credits each year.

Government Assistance Vouchers

Government agencies provide non-dilutive funding in the form of government vouchers. These vouchers support qualifying small businesses in reaching their growth goals by paying for specific business needs.

How It Helps

Businesses usually use government vouchers to pay suppliers, professional consultants, or anything else the specific government agency allows.

Potential Drawbacks

But getting these vouchers is challenging as the process is competitive. And once a business gets a voucher, it does not carry cash value. It goes directly to the service provider on behalf of the winning business.

Revenue-Based Financing

Revenue-based financing or royalty financing is funding that investors provide to businesses in return for a percentage of their monthly revenues. This is similar to a merchant cash advance, but the lender is an investor, not a bank.

How It Helps

Businesses can use revenue-based financing to get equipment on sale, gain cash flow for operations, or fund any projects.

01A6k Kt1X6tGobRGgXUDu3GtthUXvSHbz jIj6x7kZ6ZzGWIDH110ojo

Image Source

Potential Drawbacks

Among all the forms of non-dilutive funding available to your business, revenue-based financing should be one of the last options you explore.

Here’s why: a business has to sacrifice a percentage of its revenue to pay back the investor with interest, usually within four to five years. These payments can make it more difficult for a new business to grow.  

Venture Debt

Venture debt is a type of debt funding available to businesses that already have backing from venture capitalists. 

Investors provide venture debt to businesses that do not yet qualify for bank financing on the condition that the money must be paid back. This funding is provided through venture debt lenders, such as hedge funds, private equity firms, and business development companies.

How It Helps

Businesses can use venture debt for any projects but will usually get it to fund initial growth or day-to-day operations.

Venture debt is a great way to get quick funding without going through the complicated processes of a bank loan. Many successful global companies, such as Uber and Airbnb, have used it.

Potential Drawbacks

Keep in mind: venture debt comes with some risk. If your company can’t repay it and declares bankruptcy, whoever provided a personal guarantee is liable for the debt.

Annual Recurring Revenue Based Financing

The annual recurring revenue (ARR) of a business refers to the yearly value of its subscriber base. Companies such as Spotify and Netflix use this measure to evaluate profits. There are also investors who, similar to venture debt, will provide funding to businesses with a specific ARR value.

How It Helps

ARR-based financing can help a business get the money it needs to make that leap of growth and fund important research, get working capital, implement a specific project, or take other steps forward without risking ownership.

Potential Drawbacks

Similar to revenue-based financing, the risk with ARR is that paying back the investment with a percentage of ARR can impact a business's future profits.

The Benefits of Non-Dilutive Funding

Starting a new business isn’t easy, which is why 20% of businesses fail in the first two years.

But, if you know how to raise necessary funds when you need them, you’ll have a better chance of success. Non-dilutive funding offers many benefits and can be instrumental in achieving sustainable success.

Here are some of the key benefits you can count on with non-dilutive funding:

#1: Retain Full Business Control

The most exciting benefit of non-dilutive funding is the ability for founders and owners to retain complete business control.

With equity financing, businesses receive funds but also give up ownership. Depending on the terms of a deal, you could end up in a situation where investors make some business decisions, and you simply have to execute on that vision.

hn zZ33hSC3u6RwCtkOArvA7Im6urnnQuKyy12naWaJ tAT1FrF9dEalQWKP2 GlP0dQ1DQ mZqZH6e2Vi5XQkLr l4NmoauOtoxb5QuHnwMsOJz

Image Source

Non-dilutive funding avoids the struggle for business ownership. It allows founders to be true leaders who consider every facet of their business and the competitive and economic environment to make sound decisions.

#2: Favorable Funding Terms

Non-dilutive funding often comes with favorable terms. Grants, government vouchers, tax credits, and award money from SBIR and STTR programs have no repayment requirements.

At the same time, other funding options, such as ARR or revenue-based financing, require repayment with low-interest rates and long repayment terms.

These favorable conditions allow businesses to get the cash infusion they need for growth without having to pay back the money with high-interest rates or in very short time frames.

#3: Tax-Deductible

An added perk to non-dilutive funding is that the interest payments for any type of business financing are tax-deductible.

This gives additional breathing room to new businesses struggling to remain operational and decreases the overall cost of non-dilutive financing sources that do come with interest.

Is Non-Dilutive Funding Right for Your Business?

Deciding how to get financing is a recurring challenge for all business founders and owners. Every option — equity financing and non-dilutive capital — has pros and cons.

But one aspect that makes non-dilutive funding more attractive than equity financing is the ability to retain ownership of the business.

Ownership is crucial in the initial stages of business, especially as the company is establishing what direction to take in terms of strategy, product or service delivery, and marketing. Having the flexibility to make the decisions that are right for your business is important for any new startup.

Additionally, non-dilutive funding and venture capital are not mutually exclusive. Businesses can opt to apply for grants and bank loans and sell shares simultaneously. Some SaaS companies rely on ARR financing and venture capital.

As long as the business remains profitable, owners can mix and match funding options in a way that yields the most benefits for them.

Conclusion

Non-dilutive funding options are excellent for businesses that want to gain capital without sacrificing ownership. This type of funding provides the benefits of a capital infusion without any loss of equity or the risk that comes with paying high-interest rates, which is why so many startups prefer it.

If you're looking to compare options for non-dilutive funding, there's no better place than Advance Point Capital. Our small business funding marketplace allows businesses to search for various funding options, compare them, and apply in only a few minutes. Get a quote today!

Jacques Famy Jr
author social link
Jacques Famy Jr

Small Business Loan Calculators

Calculate your financing costs using our nifty calculators now.

advancepoint get quote now
advancepoint get quote now