What is non-dilutive funding?

Non-dilutive funding provides startups with capital while typically maintaining full ownership. Unlike equity financing, where you exchange company shares for capital, non-dilutive options are designed to help preserve decision-making power and potential long-term valuation of your business.

Types of non-dilutive funding

While many types of non-dilutive funding require repayment, there are also options that do not. Here’s a rundown of the most common non-dilutive funding options available:

1. Small business loans

Small business loans are a source of non-dilutive funding. They allow startups to maintain equity while accessing capital. Lenders typically assess your business's financial health, offering repayment terms of three to five years with interest. Interest payments may be tax-deductible, subject to applicable tax laws. 

Please consult with a tax professional for additional guidance.

2. Grants

Grants can be attractive funding options because they do not require repayment, making them a popular choice for startups. Although competitive, they're accessible through government programs, industry groups, and nonprofits.

Many grants are offered to support specific goals, such as innovation, research, and development. Due to high demand, grant applications can be time-intensive, so it’s wise to apply early and research grants that align with your business goals.

3. Licensing

Licensing is a way to generate non-dilutive income by allowing other companies to use your products, services, or intellectual property for a fee. Licensing can offer a steady revenue stream without diluting your equity.

It’s commonly used by companies with valuable proprietary technology, patents, or even branding elements that other businesses want to leverage. This option can provide ongoing revenue without the risks associated with debt.

4. Venture debt

Venture debt is a loan designed for companies that have already received venture capital (equity funding). Specialty banks and non-bank lenders often offer this funding to support asset purchases or increase working capital.

Repayment terms vary, with interest rates dependent on the lender and your company's growth potential. This option may be suitable for startups that need additional funds without giving up more equity, but it usually requires a proven track record with previous venture funding.

5. Vouchers and bonds

Vouchers and bonds take different approaches to raising funds. A voucher is essentially a promise to pay (like an IOU) that can be redeemed later, while a bond is a type of loan in which investors receive interest payments over the bond term.

This method helps in fundraising without affecting ownership, and at the end of the bond term, you pay back the principal amount (the original investment). Bonds are attractive to investors looking for a return without acquiring equity.

6. Revenue-based financing (RBF)

Revenue-based financing (RBF) is a flexible loan structure in which you repay the loan as a percentage of monthly revenue rather than a fixed amount. This option is gaining popularity with startups, especially those with recurring revenue models, as it allows repayments to adjust based on cash flow. RBF is a good fit for companies that expect steady growth and prefer a repayment model aligned with revenue generation.

7. Tax credits

While tax credits do not add cash directly to your business, they reduce your tax liability, meaning you’ll owe less in taxes, which can improve cash flow. Tax credits are often awarded for specific activities, such as research and development (R&D). 

By reducing your overall tax obligation, tax credits may increase retained earnings (profits that remain in the business), which can improve shareholder equity over time.

Please consult with a tax professional for additional guidance.

Advantages & challenges of non-dilutive funding

Non-dilutive funding offers a way to finance growth without sacrificing equity dilution (giving away partial ownership). However, while these funding methods provide certain advantages, there are also some challenges to consider. Let’s understand this in a little more detail:

Advantages of non-dilutive funding

• Maintain full ownership: Retain complete control over decision-making and product development.
• Build business credit: Taking on a loan or line of credit can help your small business build a strong credit history, which might improve your reputation with future investors and lenders.
• Flexible repayment terms: Many non-dilutive financing sources, like revenue-based financing, offer a repayment schedule that aligns with your revenue streams, giving you room to adapt payments to your cash flow.
• Focus on long-term goals: Without the pressure of equity dilution, you can stay focused on milestones that align with your strategic goals, keeping a solid ownership stake as your startup scales.
• Access to government grants: Non-dilutive government funding can be an affordable option, especially when you meet specific eligibility criteria, such as being in certain industries or early-stage startups with high growth potential.

Challenges of non-dilutive funding

• Smaller funding amounts: Non-dilutive funding often provides less capital than venture rounds, which might not be suitable for larger projects requiring high liquidity (immediate access to cash).
• Strict eligibility criteria: Some sources, such as government grants, can be highly selective, limiting access to entrepreneurs who meet narrow eligibility requirements. This can be particularly challenging for early-stage startups.
• Time-consuming due diligence: Applying for and securing non-dilutive financing can involve significant due diligence (background checks and data gathering) to prove your startup’s metrics and milestones. It’s essential to be prepared for lengthy documentation and application processes.
• Limited availability: Some types of non-dilutive funding, like grants, are specific to certain industries. Other financing options, like revenue-based financing, may require stable revenue streams—something early-stage startups may not yet have.
• Personal financial risks: Personal guarantees are often required for bank loans, meaning that if your business defaults, your personal assets may be at risk. This can add extra pressure on entrepreneurs without significant cash flow or collateral.

When should startups consider non-dilutive funding?

Non-dilutive funding can be a smart option for startups looking to fund their early stages without giving up equity. Here are some cases where this type of funding might align with business priorities:

• Early-stage development: If you're in the early stages of building your business, where product development and customer discovery are key, non-dilutive funding sources like government grants or revenue-based financing can help cover expenses without sacrificing the business owners’ stake.
• Testing your business model: During this phase, your business may still have limited revenue streams (sources of income), making non-dilutive funding a practical solution.
• Limited revenue but high growth potential: With non-dilutive capital, you can finance essential needs like marketing, product refinement, or hiring while keeping full control over the direction of your business. 

Moreover, assessing your return on equity (a measure of profitability determined by dividing the net income by shareholder equity) can also help you decide. Higher ROE values often indicate better profitability for shareholders.

That said, the final decision on whether to pursue non-dilutive funding—and when to pursue it—depends on your business goals, financial metrics (key figures like revenue and profit), and readiness to take on an alternative form of non-dilutive funding.

How to secure non-dilutive funding

Securing non-dilutive funding can help you grow your startup without giving up equity. Here’s a straightforward process to guide you:

1. Research funding sources

Identify non-dilutive funding options, such as grants, debt financing, revenue-based financing, tax credits, or reward-based crowdfunding. Look into each option’s eligibility requirements, duration (short-term or long-term), application process, and funding rounds. This can help identify potential matches for your business's stage and goals.

2. Understand application requirements

Each funding type has specific requirements:

• Grants: Often require a detailed proposal outlining how the funds will be used and the expected impact.
• Debt financing: Generally requires a good credit score, cash flow, and often collateral.
• Revenue-based financing: This may be suited for businesses with regular revenue; you'll need past revenue history and projections.
• Tax credits: Typically require compliance with government objectives, like research and development.
• Crowdfunding: Requires a strong marketing plan and rewards for supporters.

3. Build a strong business case

Create a clear pitch for why your business is worth funding. Describe your target market, growth potential, and how your product stands out. A solid business case can strengthen your application and increase your chances of approval.

4. Prepare financial documentation

Gather up-to-date financial documents, such as:

• Balance sheets and income statements: Show your financial health.
• Forecasts: Include detailed financial projections and budgets that show how funds will be used.
• Previous funding reports: If you've previously received funding, include a summary of how it was used and the results.

5. Collect important documents

Compile a business plan that covers your growth strategy, market analysis, and operational details. Include legal documents, such as licenses, registrations, and intellectual property records, as these demonstrate compliance and legitimacy.

6. Tailor your application

Customize each application to address the funder’s goals and expectations. Highlight how your business aligns with their objectives, use clear language, and avoid unnecessary jargon. Funders appreciate transparency, so outline potential risks and rewards clearly.

Wrap up

Non-dilutive funding can help small businesses grow while maintaining full ownership and decision-making power. However, before deciding on a funding approach, it is important to understand the potential limitations and evaluate which non-dilutive options best match your needs and revenue streams.

If you're looking for alternative options to fund your business growth, consider Rho's Corporate Cards.

With them, you can make the purchases you need to keep your business operations running smoothly without diluting your business, all while enjoying 1.25% cashback. Combined with Rho's expense management platform, you can make more strategic spending decisions and gain the insights you need to take control of your budget.

Want to learn more? Schedule time with a Rho finance expert.

Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC, and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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