Chances are you’re the owner of a small or middle-market business looking to fund your company’s next big growth initiative.
For one thing, you may not want to dilute your control over your business’ future or profits due to lost equity. At the same time, traditional bank loans are hard to come by with the stricter regulatory environment. Banks today tend to favor bigger enterprises.
What is Non-Dilutive Funding?
Non-dilutive funding refers to any capital a business owner receives that doesn’t require them to give up equity or ownership. For many, non-dilutive funding is the prerequisite step to getting their startup, small business or full-fledged operation off the ground.
During the initial growth phase, companies want to ensure that they can keep building equity, which makes non-dilutive funding a vital tool.
Dilutive vs. Non-Dilutive Funding: What’s the Difference?
As you can likely guess, dilutive funding (or equity financing) means an entrepreneur has to give up a portion of his or her ownership in order to secure capital. Invariably, dilutive funding requires a willingness to sacrifice some control over the company’s direction as well as a cut of the future profits.
With dilutive funding, businesses are called to think long and hard about the type of investors they attract. Investors may be willing to take on high risk, yet their primary goal is to receive quick returns and then make an exit. Many investors require quick growth over a short period of time, regardless of whether the business can comfortably scale.
Common examples of dilutive funding include selling shares to angel investors or venture capitalists in a round of funding. Angel investors typically require a return of 25 percent from fledgling companies with unicorn potential, while venture capitalists typically focus more on companies believed to demonstrate long-term growth potential. Well-off investors, investment banks, or non-traditional financial institutions can all provide venture capital, in addition to managerial or technical experience.
The Benefits of Non-Dilutive Funding for Entrepreneurs and Businesses
At the startup and early growth phase, running a business can be incredibly challenging. Perhaps a lack of experience or minimal credit history makes it difficult to break into traditional loans. Or perhaps the owner lacks industry connections to trustworthy investment sources. No matter the reason, companies may find that it’s an uphill battle to secure sizable capital with few strings attached.
Non-dilutive funding is especially attractive for new companies since owners retain full control of their own enterprises as they build value. Owners that are confident in their own leadership, with a firm grasp of the company’s long-term objectives, are especially committed to retaining full control.
Not only does non-dilutive capital ease the strain, it offers owners a chance to net more favorable funding arrangements since the investors are less worried about generating a large return. Non-dilutive funding agents are attracted to the sustainability and longevity of the business, which much more closely aligns with the business’ goals.
Is Non-Dilutive Funding Right For Your Company?
Fundraising is without question one of the biggest dilemmas CEOs face. As mentioned above, getting that funding from an angel investor or venture capitalist means that the founders will lose some equity and some control of the company’s operations and direction. That might not be as big a deal if the company’s valuation increases — always the goal, of course — leaving the CEO in a stronger equity position.
On the other hand, there is the issue of control — of having the final say in company decisions. That’s not a small consideration, and deciding which way to go often depends on what sort of company is doing the fundraising and where the business is in its growth cycle.
Optionality is key. There are a number of funding opportunities available, and the best option will largely depend on the specifics of your organization, your preference surrounding equity, and what kinds of goals you’re looking to achieve.
Different Types of Non-Dilutive Financing
Non-dilutive funding can take many forms. Common types include loans from family, licensing, product royalties, and revenue-based financing (RBF) and Asset Based Financing (ABL)
- Revenue Based Financing:
Annual Recurring Revenue Lending
Accounts Receivable Based Financing
Merchant Cash Advance
Sales Ledger Line of Financing
- Asset Based Financing:
Purchase Order Financing
Inventory Financing
SBA Loan Program
Venture Debt
Line of Credit
To discuss your funding options, contact Growth Capital Team today!