There are many options for obtaining funding if you are a startup. Many founders choose to seek capital through traditional banks – but in a lot of cases, they find these are too cautious about new business models and companies in an early stage. This is why several small and medium companies turn to dilutive and non dilutive funding to fuel their growth. This article will cover both options, their main advantages and disadvantages, and everything you should keep in mind when seeking either.

Understanding dilutive and non dilutive financing

Dilutive funding requires you to give a portion of your company’s ownership and some control. You’re not just providing investors with future earnings; they also receive an amount of influence over running the business. Dilutive funding is also referred to as equity funding.

Non dilutive funding, on the other hand, does not include selling a portion of ownership for your company. Loans and grants are examples of this type of funding. The most significant difference is that you can still keep complete control of your firm, which is something many startups prefer. However, you are usually obliged to repay the money you borrowed.

In short, equity financing will always cause dilution and loss of ownership – but you don’t usually need to pay the capital back. Non dilutive funding is a form of debt financing that payback will be required in most cases, but you retain complete control of your business and future profits.

Different types of non dilutive capital

There are many forms of non dilutive funding. From government grants to loans, bonds to tax credits, the options are varied. So, let’s go through them in more detail to see how each can help your business grow.

  • Venture debt: This type of loan is usually available to businesses that are already venture-funded. Some of the actors offering it include banks and lenders. Many startups use venture debt to finance equipment purchases and to grow their capital. Interest rates vary, but most lenders will suggest one-third of a company’s equity in venture debt.
  • Small business loans: When you apply for a loan for your small to medium business, the process is slightly different than what you expect for personal ones. Lenders generally will be more concerned with your business’s balance sheet and income. These loans are convenient; their terms are relatively long (three to five years), and the interest payments can be recorded as liabilities before calculating tax.
  • Grants: This is one of the most appealing non dilutive funding options for small businesses. Grants can be hard to get, but they don’t require repayment. They are typically a type of government funding. Also more common in the non-profit sphere, although you can apply to several for-profit programs via a Small Business Administration office.
  • Royalty financing and licensing: You can use royalties to repay some debt. Instead of using your company’s receivables, you utilise these licensing agreements or sell your rights directly. If your product allows it (for example, SaaS companies), you can also raise capital by licensing your products without having to give an equity share in your company.
  • Tax credits: Tax credits won’t give you capital, but they will reduce the liability on your balance sheet and improve the earnings you can retain. Tax credits also increase your return on equity rather than decrease it as dilutive capital would.
  • Bonds and vouchers: Both these options are great financial vehicles for raising capital without a third-party approval. Your vouchers are considered more of a “promise to pay,” while your bonds can be given in return for investments. This way, the lender does not get equity but an interest accrued by the bond until its maturity.

If you’re wondering which non dilutive funding scheme is best for you, consider seeking an expert opinion. Raising any form of funding requires you to be adequately prepared and know everything you can about the market, your product’s viability, and the details of your business. In short, you should be able to explain to your lenders what your company is all about – so make sure you have enough time to prepare, and if in doubt, consider getting help for your application.

Advantages and disadvantages of dilutive or equity financing

Dilutive funding, also known as equity funding, can be an excellent source of finance for a company. There are many ways in which you can seek equity options that work for you. For example, you can receive funds, advice, and mentoring from angel investors who believe in your project.

It’s important to keep in mind, though, that dilutive financing comes with its own particular demands and forfeits. So, let’s go through them so you can decide whether dilutive fiancing is a good option for your business.


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Advantages of dilutive funding

There are many benefits to raising money for your business using dilutive or equity financing. The main one is that you won’t have to worry about credit issues or loan repays. You can also learn from your investors and partners, who tend to be better connected and more experienced. But there is more. For instance:

  • The funding you get is committed to your company and its projects. The only way for investors to realise this investment is if your business does well. Equity owners are concerned with your success and will want to maximise your growth. This means they can work with you to help your company do well and are less likely to pull the plug if it doesn’t.
  • Having the seal of approval of respected investors can help you fulfil your business goals by accessing new networks and partners. Your credibility for future players is already established, and your IPO could have an attractive public profile from the get-go.
  • Angel investors and venture capital firms tend to invest in the same project or business multiple times. Dilutive funding is rarely a one-off process; on the contrary, it can help your company achieve more growth milestones over a more extended period.
  • You won’t have to worry about keeping up with loan repayments or debt financing. You can choose what business activities you want to focus on with your acquired capital.
  • Investors and venture capitalists usually bring valuable skills and experience to your business and can help you make better critical decisions.

Disadvantages of dilutive funding

Equity or dilutive funding also has some disadvantages. Mainly, you will be losing company ownership to an extent, and you will have to share your profits with your investors and lose some control and decision power within your company. There can also be potential conflicts when working with others, particularly if you have different visions for the future of your business. Other drawbacks include:

  • You will lose some capacity to make management decisions. This is not always the case, but most angel investors and venture capital investors will want to have a say in your business decision to ensure the company is working at its best.
  • You will have a smaller share in your business in absolute monetary terms and as a percentage. However, the actual worth of these shares will depend on how well your startup does, so this can be good news.
  • Raising equity or dilutive financing can be time-consuming and take away from other important business activities.
  • Any interested investor will likely want to do a comprehensive background analysis of you and your business before joining. This can translate into them looking at all your past results and forecasts and probing your management team.
  • You will have to inform your investors regularly, which can be time-consuming.

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No business’ path to success and growth is the same. If you are ready to apply or would like to learn more about our funding, get in touch today.

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Advantages and disadvantages of non dilutive capital

As a small or middle-market company owner looking for funding, you might not want to dilute your control over it. Investors and VCs will want to have a voice, but traditional banks tend to favour bigger enterprises. Luckily, there is a popular form of alternative financing you will want to explore: non dillutive funding. Common types of non dilutive funding include loans, binds, and venture debt. So, let’s go through the different types and their advantages and disadvantages.

Advantages of non dilutive funding

Non dilutive funding is quite an attractive option for new companies because their founders can retain complete control without worrying about investors and financiers. Non dilutive capital also eases the strain of having to secure unattractive loan arrangements, offering you a chance to find better deals because you don’t need to worry about significant returns. Here are some more benefits:

  • You don’t have to relinquish any company ownership. Non dilutive loans or venture debts don’t require you to provide collateral, so you keep more control.
  • Non dilutive funding tends to be easier to secure; while banks will ask you to fill in paperwork, you can secure money for your company much more easily if you go down this route. However, debt lenders trying to minimise risk might be weary of giving you debt financing.
  • You don’t always have to repay your funding. And, if you do, the cost can be much lower than with equity financing options.
  • Many people are unaware of this, but your interest payments are tax-deductible – which can help you significantly offset the overall cost of your financing.
  • You can use your current revenue to leverage more capital.

Disadvantages of non dilutive funding

The main drawback of non dilutive financing is that you will usually take on debt. Some grants are also hard to find and have long application processes, and you might require assistance when applying. Other disadvantages include:

  • Although a non dilutive funding provider won’t take an equity stake in your business, this doesn’t mean there are no strings attached. You will almost always have to repay a debt, so make sure you fit this into your profit calculations.
  • Some non dilutive funding lenders might require a personal guarantee as a backup. This means that you could, potentially be personally responsible to them.
  • There are many forms of non dilutive financing to choose from, which can feel overwhelming for new small companies. It would be best if you always considered using a funding service that helps startups and scaleups accelerate their growth.
  • The terms when obtaining funding that is not dilutive might not be as favourable as some dilutive alternatives.

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Common mistakes when comparing dilutive and non dilutive funding

Time can be critical when applying for funds – no matter their type. To avoid situations where your new funds become a liability to your company, it’s always a good idea to go through some of the most common funding mistakes and their cause.

Not planning ahead

Many entrepreneurs underestimate the effort it can take to apply for funding (or, in some rarer cases, overestimate their abilities). We have mentioned how important it is to prepare for any fundraising activity. Consider hiring someone to do this, as the process will require an excellent understanding of the industry and the time to go through the various resources. Visual presentations are a great tool to aid you in making your case. Generally, it’s advisable to give yourself at least six months to prepare your presentations and raise funds for your business.

Over-valuing your business

One thing to keep in mind is that you won’t want to over-value your business. The reason is that this can lead to raising your lender’s expectations and end up hurting you in the long term. Remember that you will need to show some growth when applying in the future, so always be honest in your analysis and don’t overestimate your capabilities.

Not ‘shopping’ for options

Different lenders and investors will offer similar financing options – but their details will vary considerably. Although there are regulations in the financial sector, most still have some leeway that allows them to operate and remain competitive. For example, some might offer better interest rates. Make sure you shop for alternatives before settling on a lender.

Focusing on your product and not your model

Lastly, although it’s normal to talk about your products and how they will solve industry or customer problems, remember that lenders and investors will be more interested in your business model. You should be able to apply for funding if you are well-informed and support your application with adequate research.


Looking for funding?

We can help. Fundsquire has funding solutions for every step of your growth journey.

Talk to us

Common mistakes when comparing dilutive and non dilutive funding

Time can be critical when applying for funds – no matter their type. To avoid situations where your new funds become a liability to your company, it’s always a good idea to go through some of the most common funding mistakes and their cause.

Not planning ahead

Many entrepreneurs underestimate the effort it can take to apply for funding (or, in some rarer cases, overestimate their abilities). We have mentioned how important it is to prepare for any fundraising activity. Consider hiring someone to do this, as the process will require an excellent understanding of the industry and the time to go through the various resources. Visual presentations are a great tool to aid you in making your case. Generally, it’s advisable to give yourself at least six months to prepare your presentations and raise funds for your business.

Over-valuing your business

One thing to keep in mind is that you won’t want to over-value your business. The reason is that this can lead to raising your lender’s expectations and end up hurting you in the long term. Remember that you will need to show some growth when applying in the future, so always be honest in your analysis and don’t overestimate your capabilities.

Not ‘shopping’ for options

Different lenders and investors will offer similar financing options – but their details will vary considerably. Although there are regulations in the financial sector, most still have some leeway that allows them to operate and remain competitive. For example, some might offer better interest rates. Make sure you shop for alternatives before settling on a lender.

Focusing on your product and not your model

Lastly, although it’s normal to talk about your products and how they will solve industry or customer problems, remember that lenders and investors will be more interested in your business model. You should be able to apply for funding if you are well-informed and support your application with adequate research.

 

How to know which working capital is best for you – and find the right provider

Although you will find numerous lenders and VCs looking to expand their investments, shopping around is always a good idea when you are in one of the early stages of growth. 

Many startups believe they will have to use dilutive funding; however, hundreds of non-dilutive options allow companies to build their business sustainably. 

Most successful investors want to make a return on their investment (and help companies achieve their goals!), but there are several ways to secure capital without giving away equity. Dilutive funding tends to be more popular among companies in an early stage, as they require quick capital to finance their growth.

How Fundsquire can help

Raising funds effectively is one of the most significant predicaments of startup founders. On the one hand, you know you might have to lose equity and give up control of your company’s direction and operations. On the other, you might look at numerous non-dilutive funding options and need clarification on which ones can fit your business model better or if there’s anything you can do to guarantee you get the funds you require. If your business thrives, this is not an issue – but you can never know whether you will end up with a strong equity position.

No path to success is the same. If you need assistance figuring out the best funding opportunities, get in touch today to discuss the type of growth funding you require directly with our team of experts. Fundsquire offers small and medium enterprises innovative cash flow financing with our Grant Advance Financing, SR&ED Tax Credit Loans, and Revenue Based Financing options.


Have a question?

No business’ path to success and growth is the same. If you are ready to apply or would like to learn more about our funding, get in touch today.

Contact us