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Working Capital Management
Non-Dilutive Funding: Your Guide to Getting Funded and Growing Your Business
For many of the small business owners, CEOs, and finance leads we work with, they need funding but don’t want to lose ownership by giving away equity in exchange for capital. They want to stay in control of the business they’ve worked so hard to build – completely understandable. The next step is to look for non dilutive funding options as part of your capital stack. But if your business is new or you’re in a hurry to take on a big project, bank financing isn’t an option.
That’s why we wrote this guide. we’ll provide you with all the information you need to know about non-dilutive funding and how it can help your business grow. We’ll cover topics such as the advantages and disadvantages of non-dilutive funding and how to narrow down the options that make the most sense based on your situation. In particular, we’ll discuss why more business owners, CEOs, and finance leaders are turning to invoice factoring as a way to get funding without dilution. So let’s get started!
Definition of non-dilutive funding
Non-dilutive funding is a type of financing that does not require you to give up any ownership stake in your business. It is usually provided in exchange for some kind of asset, such as inventory or accounts receivable. It lets you have it both ways: get the capital you need without sacrificing control of the business or giving up any equity. In other words, the company’s ownership doesn’t have to be diluted. It also typically comes with more flexible terms than other types of financing, which can make it an attractive option for businesses that need to rapidly scale or have limited cash flow.
This type of funding can also help businesses access capital quickly, as it does not require extended negotiations or lengthy due diligence processes like other forms of financing. This makes it an ideal option for entrepreneurs and businesses seeking quick access to capital with minimal risk.
Non dilutive funding for startups
Opportunities to get funding without sacrificing ownership are especially valuable to startups. It’s common to worry about being forced out of your own company as it grows and changes if you give away equity early. Everything in this guide about identifying and evaluating non dilutive capital sources applies to startups as well as established companies. However, the options are different if you don’t have a long financial track record. Most bank financing is out, but you might have access to government-backed loans or grants that an older business wont. We’ll go into more detail in the next section. (Read our page Invoice Factoring for Startups to see how invoice factoring provides cash flow for growing businesses, not struggling businesses as is commonly believed.)
Understanding your funding options relative to your stage of growth
The first step in matching the right funding option for your business is to assess what you need at different stages of growth.
- Startup stage: Building a finance function is key to securing the funding your business needs to make it to profitability. A fractional or consultant CFO can help you get there by preparing financials, forecasting cash flow, and recommending funding options. You might also need funds to get a product to market quickly.
- Non-dilutive funding options to consider: grants, government-backed loans, venture debt, crowdfunding, tax credits, invoice factoring (aka revenue-based financing)
- Growth stage: The growth stage is exciting. However, rising growth means rising costs. In addition to making hires, you might also need to invest more in product development, marketing, and sales. Oftentimes companies in this category need funding to take on big projects to keep growing.
- Non-dilutive funding options to consider: grants, bank loans or lines of credit (if possible), tax credits, invoice factoring
- Maturity stage: This is when your business feels more stable as rapid growth has slowed. At this point, you might need non dilutive funding for going after especially large projects or further expansion.
- Non-dilutive funding options to consider: bank loans or lines of credit (if time is not an issue), tax credits, invoice factoring
Advantages and disadvantages of non-dilutive financing
Non dilutive funding can be a great way to fund your business without having to take on debt or equity. However, it’s important to consider all of the pros and cons before making a decision.
- You stay in control of your company
- No need to repay debt (forms of debt financing excluded, obviously)
- Often quick to access
- Flexible and convenient
- Some sources easy to qualify for
- May need to repay debt (depending on source)
- Can require time-consuming due diligence (for bank financing, not alternative finance)
- Can be difficult to record in accounting (for invoice factoring, see our step-by-step guide for recording invoice factoring in your accounting! It’s written for QuickBooks, but the method applies even if you don’t use QuickBooks.)
Who should consider non-dilutive funding?
Non-dilutive funding is particularly suited to entrepreneurs and startup companies who want to retain ownership of their business.
It’s also ideal for established businesses who may not be eligible for traditional forms of financing due to lack of collateral or a need for funding quickly – for taking on a big project that requires upfront payments for equipment and materials or making hires, for example. It’s ideal for businesses who don’t want to hassle with banks.
Types of Non-Dilutive Funding Sources
After taking stock of your growth stage and your use case, it’s time to think about the non-dilutive options that would suit you best. Here are the most common sources:
Invoice Factoring: Invoice factoring, also known as invoice funding or revenue-based financing, involves a business getting funding in the amount of its outstanding invoices. It’s a fast, flexible option for B2B businesses who have long invoice terms. (think 30, 60, or 90 days!) They can tap into non-dilutive capital they’ve already earned to make payroll or fund big projects that will help them grow. Learn more about what invoice factoring is all about.
Grants: Grants are typically awarded by governments or non-profit organizations, and involve no repayment of principal or interest. Grants are typically used to fund research and development projects, but can also be used for non-research related projects such as hiring strategies and marketing campaigns.
Term loan or Line of Credit: Loans consist of repayment schedules with a fixed interest rate over the loan’s term. These loans come in a variety of forms, including SBA loans, microloans, and non-profit loans. Lines of credit enable you to draw funds any time up to a certain limit. We’d like to note that while bank financing can be helpful, many of our clients have had difficulties with it: successful businesses that don’t have a long track record don’t qualify. Even for our clients with established businesses, the bank often was going to take months to give them the funding they needed to take on a large project quickly. Loans and lines of credit are worth it if possible, but it’s never a bad idea to have other sources of quick, convenient funding.
Venture Debt: Venture debt is a non-dilutive loan for startups and early-stage companies. Unlike traditional loans, venture debt does not require collateral assets or personal guarantees from the company’s owners.
Tax Credits: Tax credits are non-refundable incentives provided by governments to encourage investment in specific industries or projects. These credits reduce the amount of taxes owed, and can be used to fund research and development activities, as well as hiring and expansion initiatives.
Crowdfunding: Crowdfunding involves raising capital from large groups of people in exchange for rewards or equity.
Selling Preferred Stock Shares: Preferred stock shares are non-voting shares of a company’s equity that generally offer higher dividends than common stock.
How to Identify the Best Non-Dilutive Funding Sources for Your Business
When narrowing down your short list of non-dilutive capital sources for your business, it is important to evaluate:
- Cash flow: Do you have an urgent shortfall or is your forecasting predicting a future shortfall? When will monthly revenue come in? Future revenues? Our cash flow guide can help you get a handle on this if needed.
- Speed of funding: If you have time and you’re a startup, you can apply for grants or a government-backed loan. But if you need funding quickly, you’ll need to look into alternative finance.
- Amount of funding: Do you need a microloan or to fund a $3 million dollar invoice?
- Regulatory requirements: For example, crowdfunding campaigns must comply with the Securities and Exchange Commission’s regulations if you’re in the United States.
Finding the Right Funding Provider
Once you have identified the sources that are right for your business, it is important to find the right funding provider. This can be a tedious process, as there are often dozens of in the marketplace. But by zero-ing in on your criteria, you can narrow them down into a short consideration set:
- Referrals from colleagues: Your network will have suggestions on who to go with and more advice on what to look for in a partner.
- Experience level: A track record of success speaks for itself. But new players can also be really helpful, and possibly for a deal. This is about your comfort level and priorities.
- Customer service: Will you have a dedicated account manager to guide you through the process and help with future fundings? A long-term relationship will make funding faster and easier.
- Application and funding process: Applying online and finding out if you’re pre-qualified should take just a few minutes for any provider. Look for integrations with other technology platforms for convenience in getting your first funding. (FundThrough is integrated with QuickBooks and OpenInvoice to pull eligible invoices into the platform automatically.)
- Cost: In addition to evaluating rates, ask about hidden fees. A low rate on paper can be hiding service fees, application fees, and annual fees. (FundThrough only charges one flat fee.)
- Terms and conditions: Repayment schedules, interest rates, reporting requirements, personal guarantees: are the terms reasonable based on the market? What happens if you can’t make monthly payments?
- Partnership: No matter what type of non-dilutive capital solution, funding partners should be exactly that: they should prove that they’re a partner in your success. That means doing everything they can to get you funded when you need it. (As entrepreneurs ourselves, we understand what it’s like to be in a cash flow crunch and not want to give up part of your business through equity financing!)
Why small business owners choose invoice factoring for non dilutive funding
nvoice factoring, or revenue-based financing, has several advantages over other non-dilutive funding options. These include:
- Quick access to cash: Invoice factoring gives you quick access to funds, as payments are made within days (upon approval).
- Easily scalable: With invoice factoring, you can easily scale up or down your funding needs depending on your cash flow situation. FundThrough in particular doesn’t require you to fund a minimum dollar amount or number of invoices every month.
- Flexibility: Unlike other non-dilutive funding options, invoice factoring allows businesses to determine the amount of funds they need and when they need it, based on the size of their invoices.
- No requirement for length of time in business: Many invoice factoring companies will fund new businesses.
- Funding depends on customer creditworthiness: Because your customer pays the invoice to the factoring company, your own creditworthiness isn’t under the microscope. It also means you get more time in your day since you don’t have to manage A/R. Find out how FundThrough ensures your customers have a positive experience.