Hustle, a growth mindset, and tenacity are necessary to thrive when you decide to pursue entrepreneurship. Being careful about raising finances while managing the volatility of business is one of the most crucial responsibilities for startup founders. Entrepreneurs entering the fundraising process as an early-stage business find themselves negotiating several alternatives available for them to support their expansion, including something like non-dilutive funding.
However, opting for raising funds through venture capitalists results in ownership dilution, which is not very ideal for businesses that are just starting out. This is why non-dilutive financing may be the best choice for your next funding round if you’re looking for a way to raise money for your business without giving up equity.
As more and more companies see the advantages of raising finance without giving up ownership, this form of financing has become increasingly popular, particularly amongst startups. Starting with the fundamentals, let’s dive into exploring non-dilutive funding for startups.
What is non-dilutive funding?
Non-dilutive funding is capital financing that you can access without having to lose any of your company’s equity and retaining full ownership of your company. This is contrary to venture capital (VC) investments, which often require transferring a percentage of your ownership to obtain operating capital.
You can get access to funds also based on other business considerations with non-dilutive funding. For startup founders and small-to-medium-sized business owners who are looking for finance that doesn’t need them to give up equity or ownership of their business, non-dilutive capital is a solid alternative funding choice. Non-dilutive finance has many benefits, including the capacity to retain equity and maintain control over the business. Non-dilutive funding can be a fantastic choice for firms that match the qualifying standards and are seeking an alternative to equity financing or dilutive funding
If you’re thinking about non-dilutive funding for your startup, make sure to weigh all options to determine why its the best for you.
Non-dilutive financing vs dilutive financing
Usually, companies must cede some ownership and control in exchange for dilution capital. With dilutive capital, companies give investors future earnings in addition to giving them some control over how the company is handled.
On the other hand, non-dilutive funding excludes the sale of stock in the company. This kind of finance includes things like loans, grants and also at times, revenue-based financing. The biggest distinction is that startups can still have total control of the business, which is what many startups choose.
In essence, equity or dilutive financing will always result in ownership dilution and loss, but startups often don’t have to repay the funds. Non-dilutive financing is a type of financing where repayment is typically necessary but where founders keep full control over the company and future revenues.
Why non-dilutive financing?
The majority of professional investors want to see a return on their capital, or in other words, they want to see their investment’s value increase over time. While some investors are more interested in assisting the company in accomplishing its goals than in maximizing their own returns, most VCs look to rapidly maximize their investment.
Non-dilutive fundraising might be appealing in this situation since it enables financing companies to assist a business without purchasing stock. There are plenty of benefits for business owners as well, as they may continue to have total control over their operations. This is important for businesses developing innovative ideas since they might not want to give up any control over their final product or service. Also, organizations that are not yet profitable may benefit from it as they may not want to dilute equity by selling shares at a lower price.
Non-dilutive finance might also offer a more certain road to profitability because the firm won’t have to give up any stock. The terms of non-dilutive financing might be less advantageous than those of dilutive financing, therefore there are some risks involved here too. Due to the scarcity of financial sources, it may also be more challenging to get non-dilutive investment.
The advantages of non-dilutive financing, however, exceed the drawbacks for many startups.
Pros of non-dilutive funding
- To obtain funding, founders don’t have to sell a portion of their company
- Without putting up personal collateral or demonstrating creditworthiness, startups can acquire business funds easily
- Businesses can use their current or predictable revenue to leverage money that they can responsibly repay
- Non-dilutive funding allows a repayment schedule that works best for the business
- The cost of selling stock might be relatively high in comparison to borrowing; your funding will be more affordable
- Non-dilutive finance might serve as a link to the next round since private enterprises cannot borrow money to raise funds
Cons of non-dilutive funding
- Startups might initially only get a lower amount of funding
- It might be more difficult to qualify for non-dilutive financing since the financiers will try to reduce risk
- Due to the lack of regulation surrounding some of these non-dilutive funding sources, some lenders may offer highly strict terms, which may include personal liability
Who should opt for Non-Dilutive funding?
Non-dilutive funding is preferable to traditional forms of financing in many scenarios including business funding for startups and SaaS funding. This can involve SaaS funding for launching a new product, entering a new market, or delaying the next round of investment while raising valuation. It can also be utilized in conjunction with equity financing to lessen total dilution.
Non-dilutive finance is particularly appealing as business funding for startups that wish to maintain total control over their enterprises. Also, it is helpful for SaaS businesses that substantially require an immediate inflow of operating capital to accomplish long-term expansion.
These categories usually include marketplaces, eCommerce, subscription-based services, business funding for startups, and SaaS funding. Non-dilutive investment with a longer and more reliable return period from marketing activities can also be advantageous for SaaS enterprises. Entrepreneurs in these industries can readily benefit from non-dilutive capital to increase their efforts in digital advertising campaigns, which are ongoing costs with quick payback and quantifiable ROI.
Famous platforms like Slack, Canva, Elevate K-12 and Mailchimp have all raised their SaaS funding through non-dilutive financing.
Types of non-dilutive funding available for SaaS funding
Banks, credit unions, online lenders, and non-bank financial institutions can all offer loans. Short-term loans are designed to provide instant money and frequently require quicker repayment. They typically offer less money and charge higher interest rates than long-term loans. But, online lenders have made it simpler for business owners—particularly SaaS business owners—to get authorised for short-term loans.
Long-term loan approval is more difficult to come by. Conventional banks have stringent guidelines and a reputation for rejecting new, small businesses, particularly SaaS companies which they are still unable to adequately underwrite.
Venture debt is a non-dilutive funding option that is only available to firms with venture capital backing. Small businesses have the choice here to take on debt as opposed to giving up company stock.
Banks, hedge funds, or private equity organisations will work in collaboration with venture capital firms to fund the startup. When a company wants to extend its runway between investment rounds, venture debt is thought to be a fine addition to equity funding.
Startups have just started using crowdfunding, a relatively new method of raising funds. Startups can raise small amounts of money from many people through crowdfunding websites, usually in return for benefits like product discounts or access to innovative features.
Merchant Cash Advances
A sort of non-dilutive financing called an MCA is repaid with a portion of the borrower’s future sales. For companies who find it difficult to qualify for conventional financing but are confident in their ability to generate revenue, this can be a smart option. Non-dilutive finance might be a fantastic method to launch your firm without sacrificing ownership. When applying for any kind of assistance, it’s crucial to compare your alternatives and confirm that you are eligible.
Subscriptions are another method of app monetization. Users pay a recurring fee under this model to access the app’s features or content. For apps that deliver frequently updated content, this is a great choice.
Licensing and royalty
Firms can also use royalty finance or a license for their products or technology as a non-dilutive funding option. This may be a good approach to making money without sacrificing any company stock. It might also be a very profitable alternative if the company has a distinctive product or technology.
With revenue-based financing in Europe, investors receive a portion of a company’s monthly revenue as payment rather than interest until their initial investment is repaid. Software businesses and startups are increasingly using this funding option since it offers a more flexible payback structure than conventional loans. Several business expenses, such as advertising campaigns, product purchases, and employee salaries, can be funded via revenue-based finance.
This is particularly suitable funding for SaaS businesses with consistent subscription-based revenue that may struggle to secure capital from other non-dilutive funding sources simply because traditional sources have difficulty comprehending and approving SaaS business models. Although this form of financing entails some risks, it can be a great way for companies to get the money they require to expand and scale their operations.
At Viceversa, we offer flexible capital tailored to your business, financial and timeline needs which needs to be repaid only with a percentage of your future revenues.
How to get access to non-dilutive funding for your startup?
Getting access to non-dilutive financing is fairly simple today. With Viceversa, your startup can enjoy the benefits of non-dilutive financing easily. Vice-Versa offers your company
- Upto €5M of flexible capital.
- Tailor-made offer for your business within 3 days
- Unlimited business insights
- 100% equity-free capital
- Guarantee-free capital based on your track record.
Interested to get quick access to funds for your startup? Check your eligibility here.
Is non-dilutive funding the right choice?
Without a doubt, one of the major confusions CEOs encounter is business funding for their startups, hence before choosing a funding alternative, a few things like company growth, recurring revenue, the willingness to give up ownership, and the speed at which the funds are needed must be scrutinised thoroughly.
The best course of action usually hinges on the type of organisation conducting the fundraising as well as the stage of the company’s growth cycle. Non-dilutive funding might be a wonderful fit for your business if it has had rapid year-over-year growth and has a stable and sizable recurring revenue. SaaS businesses, for instance, frequently achieve profitability earlier than other types of businesses since their recurring revenue makes them a great fit for non-dilutive funding.
Still unsure, if this is the right choice for your business? Get in touch with us here.
Interested to hear more? Check out Viceversa’s RBF platform today.
We are proud to share stories of our open network of entrepreneurs who have used Viceversa’s funding to grow their digital businesses.