Growing a business from the ground up can seem like an impossible task—one that needs time, energy, and most importantly, financial funding.
While there are plenty of options to choose from when it comes to raising capital, it can be an overwhelming decision to make when equity comes into play. It’s not uncommon for founders to give up ownership within their company to bring investors on board. The real question is, is this the only option for financing the beginning stages of a business?
Believe it or not, there is another way. It’s called non-dilutive funding, and we’re going to cover what this means and why it’s a key financial alternative for new business owners. But first, let’s take a look at its counterpart, dilutive funding.
What is dilutive capital?
Dilutive capital (or dilutive funding) is defined as any type of funding that requires a founder to give away equity (a piece of their company) to investors. Equity funding is the primary pre-seed or seed funding for startups because the company has nothing to trade but the company itself, AKA equity share.
The biggest advantage is there’s no scheduled repayment requirement. This type of backing is also beneficial to start-ups that need guidance from seasoned professionals; by working with angel investors or a venture capital firm, the company creators have a direct line to the business community.
The downside? Dilutive funding comes at a price. Not only are you giving away future profit shares, founders are also required to give up ownership to their investors. Sharing ownership means that founders have to share control over company direction, goals, and operations.
Dilutive funding investors often have ultra-high expectations when it comes to return. This can create conflicts down the line if the interest of the investors and the company doesn’t align.
What is non-dilutive capital?
As its name suggests, non-dilutive capital or non-dilutive funding does not require founders to give up ownership of their company, so the equity remains non-dilutive. Most non-dilutive capital requires repayment, but there are some exceptions as well—we’ll get to those later.
Six primary benefits of non-dilutive funding:
1. Founders maintain full control of the company
Non-dilutive funding doesn’t require giving ownership to investors. This is the most essential benefit for start-up founders, as they’ll retain 100% equity and full control of their company.
2. Founders maintain some to full control of the amount of funding
With a vast amount of non-dilutive funding options, founders have the ability to pick and choose what works best for their company. They’ll have overview and insight into the amount of funding and any interest or repayment schedule that comes along with it.
3. Short-term cash flow relief
Startups and companies in the beginning stages need cash—to buy inventory, build out products, hire team members, and buy equipment, etc.! Many non-dilutive arrangements work as advances, meaning founders will receive investment promptly to support marketing efforts, the launch of a new product, and more.
4. Quick capital for business needs
Unlike equity funding that typically takes months (if not years) to receive, some types of non-dilutive capital take as little as a few days to settle in the company account. Capital is a critical component for startups, as it coincides with the business’ ability to fund day-to-day operations and future growth.
5. Various payment options
Many non-dilutive arrangements allow for more flexibility in payment, as the payment amount is based on revenue. Slower periods of revenue mean lower payments!
Different types of non-dilutive funding:
Bank loans
Bank loans for startups work similarly to personal loans or other online lenders, however the approval process to confirm a viable business plan can be a difficult one. They’ll request completion of a lengthy application with information like credit score, business history, recurring revenue, and other documents to determine if your company is eligible.
Primary benefits
- Favorable, tax-deductible interest rates
If you already have an existing business with an established financial history and good credit score, banks are more likely to provide ideal interest rates, because you are not a risk to take on. - Security and established reputation
Working with a trusted bank for funding is low-risk, high reward. Many businesses in the beginning stages might feel more comfortable engaging with a household name for financing.
Primary disadvantages
- Strict eligibility standards
Banks will not give out loans to just any business. They’ll need to know that your company is a low-risk investment for them, which means you’ll need to present an established revenue stream and growth plans.
- Lengthy application process
To determine eligibility, bank loans tend to require revenue forecasts, comprehensive business plans, financial history, and more. On top of that, banks will need to go through everything in detail, making the process a long and tiring one.
Popular business loans
- With a lower credit score requirement and multiple term lengths to choose from, Bluevine is a great option for small businesses (especially startups). They typically accept borrowers with as little as 6 months in business.
- A household name, Chase is a preferred SBA lender and startup friendly with no minimum thresholds for length of business.
Government or private grants
Federal grants or NPO grants are the only non-repayable funds out there. Awarded to businesses from the government, this type of lending is subject to intense rules and regulations, and availability depends on the federal budget.
Primary benefits
- Not expected to be repaid
Sounds too good to be true, right? Federal grants are considered donations from the government to small businesses, so there’s no need for repayment. - No limit to submitting to multiple applications
There are thousands of grants available for small businesses each year, and startups can apply to as many as they have the time (and energy!) to.
Primary disadvantages
- Extremely competitive
Competition for government funding is fierce. The non-repayment factor is a huge draw, bringing a sea of small businesses to the application process. And the process itself is difficult! Many companies hire professional grant proposal writers to make sure their startup is a viable candidate. - Short-term cash flow, typically one-time funding
While your business might receive a large sum of money via a grant award, typically it is not a recurring source of funding. For long-term financial options, you’ll need to look into other funding opportunities.
Examples of grant-funded startups
- In 2019, Audra received $50k in grants, and became a globally known collection of women’s designer fashion and apparel. Currently, Audra apparel is sold in both boutique stores and online.
- Founded in 2012, Canva is a graphic design platform and publishing user-friendly tool for creating visual content.
Annual Recurring Revenue (ARR) & Monthly Recurring Revenue (MRR) line
Recurring revenue financing like ARR or MRR lines of credit are popular options for small businesses. Unlike traditional financing, this type of credit’s maximum borrowing amount varies based on your revenue stream.
Primary benefits
- Lower cash flow burden
Recurring revenue type financing is based on your actuals, so there’s flexibility with payment. For example, when your MRR goes up, you’ll pay more; however, when your MRR goes down, you’ll pay less. - Low cost option
Primary disadvantages
- Specialized profile
To qualify for this type of lending, your business will need to have a true SaaS (software as a service) subscription-based model. - High annual revenue requirement
Companies engaging in this capital must be of sufficient scale. Each requirement varies by lender, but typically the annual recurring revenue of companies will need to be around $3 million.
Examples of MRR startups
- MailChimp is a marketing automation platform designed to help businesses engage their customers, boost sales, and establish the customer lifecycle.
- Founded in 2009, Slack changed the way businesses communicate, offering a secure, enterprise-grade environment for channel based-messaging and working with some of the largest companies in the world.
Revenue-Based Financing (RBF)
Revenue-based financing (also known as royalty financing) lends businesses a set amount of money from an investor (or group of investors) to be put towards scaling the company. In return, the investors receive a percentage of the company’s revenue over a set period, up to a defined amount.
On top of all the standard non-dilutive capital benefits, RBF has its unique advantages:
Primary benefits
- Flexible, revenue-based payments
When your cash flow goes down, your payment goes down. Even during slower revenue months, your company cash flow won’t be drained with payments to investors. - No personal guarantees
Even if the business is unsuccessful, the CEO or founder won’t have to assume responsibility for the balance. - Fast funding
Businesses that receive RBF get funded in one to two weeks
Primary disadvantages
- Investors own a piece of the revenue stream
A percentage of the revenue will need to be paid back to investors, reducing the amount of money that can be reinvested back into the company. - High standards for approval
A business will need to have existing sales, expectations for growth, and confidence in returns before investors will commit to providing an advance.
Examples of startups that have leveraged RBF:
- ClassWallet
- ClassWallet is a digital wallet that pays and reports decentralized purchases. They’ve received over $6 million in funding, and serve over 3,900 schools and 13 state departments.
- Ria Health
- Ria Health is a tech-enabled telehealth medical practice that provides evidence-based treatment for Alcohol Use Disorder (AUD). They work with various health insurance plans to provide convenient, affordable options.
- TVP NYC
- Founded in 2012, TVP is an ecommerce supply chain integration that streamlines end-to-end supply chain management.
- Elevate K-12
- Elevate K-12 is an online educational company that has raised over $19 million in funding to date. They partner with schools and districts to provide high-quality, online learning.
Is non-dilutive funding right for your business?
Choosing the right financing for your company is no easy task, but there are a few ways you can determine what model will work best for your business.
A few things to keep in mind are your company growth, your recurring revenue, whether you want to give up ownership of your business, and how quickly you need access to capital. If your company has been quickly growing around 20-40% year-over-year and you have an established and sizable recurring revenue, non-dilutive capital may be a great fit for your company. Plus, it’s the only type of financing that allows for complete control of equity and immediate cash flow relief.
If you’re looking for revenue-based financing to drive growth, we’re here to help you every step of the way, with full transparency. Simply click on Get Started to sign up an account or contact us to schedule a call, learn more, and start your funding journey.
Still unsure of where to begin? Download our free startup fundraising guide here to discover your best capital options.
