Are you a growing startup asking yourself what the right type of funding is for your business at this stage?
Spoiler alert: There is no one right answer.
Whether you’re in the startup or scale-up phase, choosing the right funding source for your unique business is critical. Raising venture capital can provide the cash you need to grow and introduce new strategic partners to your team. But securing the right partners at the right valuation for your business is key. Rushing this can mean giving up too much equity in your business too soon.
Enter, non-dilutive funding.
Alternative funding arrangements like non-dilutive capital can work well for small and medium-sized businesses that don’t have a robust network of investors. It also works well for business owners that are not ready to give away equity in their company. If you raise a funding round before your business has the chance to demonstrate meaningful growth, you risk losing equity at a valuation you will later regret.
Non-dilutive funding can help business owners accelerate growth between equity rounds to propel the business to the next level or work supplementally alongside venture capital.
Non-dilutive funding is a type of funding that doesn't require equity in exchange for capital. This means business owners don't need to dilute their ownership to gain the capital they need to run and grow their business. Examples of non-dilutive funding include bank loans, grants, crowdfunding, licensing and royalty financing, and tax credits.
Non-dilutive startup funding is popular among founders looking to maintain ownership. But bank loans can be difficult to obtain, especially for younger companies, and options like grants and tax credits aren’t available to many businesses. In recent years, more private lending firms and fintech companies are popping up to address this challenge by providing non-dilutive funding to startups.
Dilutive funding, also called equity financing, is exactly what it sounds like — funding that requires you to give away a portion of your company. When you give up partial ownership of your company, you inevitably relinquish some control and a portion of your future profits.
Standard examples of dilutive funding include selling shares in your company to angel investors and venture capitalists (VCs). Introducing new equity shareholders into your business will dilute your company's shares. It also gives your new shareholders a say in how you run your business. At the same time, these investors often bring extensive experience in the startup space and can introduce new perspectives to your business strategy as well as new funds.
Dilutive funding makes headlines, which can be attractive to new startups looking to increase brand awareness. But it may not be a fitting funding option for a business still in its early growth stage. This is because investors have short-term profit expectations while many early founders want to focus on the long-term vision for their business.
Revenue-based financing is an example of non-dilutive funding that allows small businesses to pay the lender a percentage of their monthly revenue over time, rather than giving up any equity. Different lenders offer different non-dilutive funding options. Startups with a subscription revenue model, may look for annual recurring revenue (ARR) lending. Businesses that sell through retailers, on the other hand, may want to partner with a company that offers accounts receivable or asset-based lending.
Non-dilutive funding is best suited for companies that want to maintain complete control over their holdings or who want to supplement funds they’ve raised from investors. Holding on to equity early on can be advantageous as a business grows. Startups with non-dilutive equity holdings can be better positioned for larger funding rounds down the line. In contrast, diluting your company's shares too early may lead to more share devaluation as the business grows.
Retail and E-commerce businesses on the path to growth may want to consider taking on non-dilutive startup funding to cover cash flow gaps and operating expenses. Some private lenders and fintech firms will offer non-dilutive capital like revenue-based financing based on projected sales forecasts and revenue. This can help businesses pay vendors and employees, purchase materials, and fill orders much more quickly than they would otherwise.
New businesses looking to build momentum can also benefit from non-dilutive funding. This will provide the initial spend necessary to invest in marketing initiatives, bring on new resources, and grow the business.
Regardless of business type or industry, founders should be hesitant to jump at the first offer for funds. Business owners should remain at the driver’s seat, making thoughtful, intentional decisions about the type of funding that will best support their vision. Once this is established, they can seek out the right partners to help them achieve their financing goals.
According to Tech Crunch, startups are taking advantage of non-dilutive funding options even more in recent years.
Founders often raise a friends and family round or invest their own savings and bootstrap the business early on. They are finally able to see rapid growth on the horizon and are eager to lead their business there without a board of investors driving the decision-making.
Non-dilutive funding gives business owners autonomy and the single voting power to lead their businesses in any direction they want. Many founders value room for creativity in their businesses almost as much, if not more than they value enticing VC deals and funding.
Loans are a simple form of non-dilutive funding. New businesses can gain the money they need for their marketing efforts or operating expenses with this non-dilutive capital opportunity. Loans attract interest and can be received from banks, friends and family, private lenders, and fintechs.
Grants are also an ideal type of non-dilutive funding. They are highly sought-after by new businesses and established organizations looking to scale. Grants do not attract interest or reimbursements. They are mostly awarded by governmental institutions looking to support lucrative businesses at different stages. Grants lay a solid footing for businesses, at which point, owners can decide to sell shares to investors to boost expansion activity.
Crowdfunding is an alternative funding option where money is raised from a large number of people, usually via the internet. Crowdfunding is especially common among NGOs and nonprofits. It is also common among musicians and celebrities with a fanbase, who ask their fans to donate small amounts to them for specific purposes.
Tax credits allow organizations to subtract an amount of tax they've accrued in credit from the total amount they owe. This type of non-dilutive funding is ideal for larger corporations that pay large amounts in taxes annually
Revenue-based financing is an alternative funding method for small businesses and startups looking for immediate cash advances to fund business activities. This type of non-dilutive capital is given to business owners upfront, for a small percentage of incoming revenue.
Non-dilutive funding gives founders an alternative to giving up equity in their business. Business owners with a great team, unique product or service, and solid business growth plan may not need to part away with equity before they’re ready. With non-dilutive funding, they can get the capital they need to operate and grow.
It also gives founders the opportunity to spend more time focusing on the business itself. Early on, a small startup team needs to maximize every minute. Founders that spend too much time pitching to investors, may lose valuable hours that could be allocated to growing the business.
The right finance firm or fintech will provide access to the cash they need when and where they need it. This means not dictating how the capital is spent and where it fits into a larger business plan. It empowers founders to run their business, promote their brand, accelerate their growth, and be well positioned when the time comes to raise a funding round.
Whether you’re just getting started or experiencing exceptional growth, Aion can provide cost-effective capital to meet the needs of your business. As a team of entrepreneurs, Aion understands that each business faces unique challenges and the funding solution that works well for one startup, may not be appropriate for another. Aion considers factors like industry, revenue model, seasonality, and much more to get you the right funding for your business. Our competitive rates and quick turnaround time help business owners unlock revenue and get paid on day one.