Fundraising stands as a pivotal element in company development, impacting growth, profitability, expansion, sustainability, financial autonomy, and mentorship.
At the crossroads of these factors, two fundraising choices emerge: non-dilutive and dilutive funding.
Equity financing, while attractive, comes with its set of complexities. Non-dilutive funding offers a potential solution for those seeking to sidestep its intricacies.
This article delves into non-dilutive funding options, their pros and cons, and strategies for securing it for businesses.
What is Non-Dilutive Funding?
While dilutive funding is popular with VC firms backing startups, it poses long-term risks for the business and its founders. These include loss of control, difficulty raising future rounds, reduced value of each shareholder's investment, etc.
That's where non-dilutive financing comes in. Non-dilutive funding refers to the capital that a company or organization raises without giving up equity or ownership stakes. In other words, it's a form of financing that doesn't dilute the ownership of existing shareholders.
Non-dilutive funding can come in various forms, including grants, loans, or revenue generated through sales.
It doesn't require giving up your company's equity or ownership in exchange for capital and is ideal for small to mid-sized businesses looking to grow sustainability and profitably.
It differs from dilutive sources of funding in the following ways:
- Dilutive funding requires giving up control in the form of shares, whereas non-dilutive funding is the complete opposite.
- Investors (venture capital firms, angels, etc.) provide a network of mentors, resources, tailored advice, etc., to accelerate growth. All of these benefits don't come with most non-dilutive funding options.
- Venture capital places a greater emphasis on fast growth, whereas non-dilutive funding gives you greater control over where you wish to invest the borrowed capital.
- You don't need to pay back venture capital or other dilutive funding. However, that's not the case with most, if not all, non-dilutive funding options. For example, debt financing must be paid back with interest, which is not the case with VC investments.
Types of Non-Dilutive Funding
Different types of non-dilutive funding sources suit unique companies best.
For example, revenue-based financing is best for a mid-sized startup generating considerable revenue with an immediate need for upfront cash.
On the other hand, new research-based startups or ones working on social impact initiatives can seek research and innovation grants from government agencies, business associations, and nonprofit organizations for their capital needs.
This section will cover five major alternative non-dilutive funding sources to help you decide which is best for your business.
- Venture Debt
- Revenue Based Financing
- Grants
- True-Sale Based Financing
- Crowdfunding
1. Venture Debt
Venture debt is a loan usually offered alongside a traditional equity fundraising round to high-growth startups with instant cash needs. It's provided with a higher interest rate and a shorter repayment period to make it worth the risk for the lender.
You might've seen this form of funding on TV shows such as Shark Tank, where the investors offer some funding in exchange for equity in a company and the rest as loans through debt funding.
Pros:
- The cost of taking on debt financing is less than the cost of diluting equity over the long run
- Allows founders to raise capital in between equity rounds
- Easy and fast process compared to equity financing
- Terms are less restrictive than a bank loan
Cons:
- Binds startups to a payment schedule
- The fine print often contains details that cause companies to default, such as higher interest rates and shorter repayment periods.
Best for: Early-stage SaaS companies (pre-Series A) looking for quick capital between funding rounds.
2. Revenue-Based Financing (RBF)
RBF is a new form of non-dilutive funding that pays upfront cash in exchange for the rights to a percentage of future revenue.
It doesn't require you to appoint any assets as collateral, and it adapts to the business's health.
The amount paid back depends on how much revenue you bring in. Based on that, RBF providers look at your projected revenue and finance a certain percentage of your ARR (Annual Recurring Revenue) or MRR (Monthly Recurring Revenue).
With RBF's payment flexibility, the seller gets immediate access to capital while the financier collects the revenues that trickle in slowly.
The seller's customers get to choose from a range of payment plans, eliminating the pressure of paying upfront, which in turn helps the seller retain customers.
For example, Brainshark used Ratio to finance up to 80% of their recurring revenues with flexible repayment periods. This might not have been possible with venture debt and traditional RBF without equity dilution or paying significant amounts of money as interest.
Pros:
- Doesn't require a personal guarantee in most cases
- Flexible payback based on your revenue and schedule. Your repayment time decreases if you grow faster
- It's fast and easily accessible
- The revenue cut is less than the interest on traditional loans
Cons:
- Loan amount depends on revenue, which can hurt smaller companies
- Early-stage businesses with inconsistent revenue might not get approved
Best for: Subscription-based SaaS businesses looking to grow without giving up ownership.
3. Grants (Awards)
Government grants are often the most sought-after source of non-dilutive funding as they're "free money." They're often used to fund research, aid the development of small businesses, and bolster the growth of specific emerging sectors.
Grants often target underprivileged and underrepresented demographics, such as women in tech. However, applying for grants is tedious; nevertheless, getting one can pay off!
For example, Xcimer Energy, a leading fusion science company in the U.S., was recently awarded a $9 million grant by the U.S. Department of Energy (DOE) under its Milestone-Based Fusion Development Program.
Pros:
- Grants don't need to be paid back.
- A huge number of grants are available, especially for emerging sectors. Examples include Minority Business Development Agency (MBDA) grants, the Market Development Cooperator Program (MDCP) by the International Trade Organization (ITA), etc.
- Grants boost a business's credibility.
Cons:
- Applying for them is tedious and time-consuming
- Fierce competition for these grants
- Emerging sectors are given priority over established ones
Best for: Early-stage businesses solving niche problems or conducting innovative research
4. True-Sale Based Financing
In true-sale-based financing, you transfer the ownership of an asset to another party (the buyer). For a software company, this might mean transferring an annual non-cancellable contract to a buyer in return for instant cash.
It's similar to RBF, with the critical difference being that you don't have to pay back a percentage of your monthly revenue. You can simply sell off your contract for upfront cash and let the buyer worry about all the other hassles. For example, Nextech3D.ai received $2M in cash from Ratio for future invoices and contracts.
Pros:
- Improves balance sheet and adds to cash flow
- Flexibility in payment terms and schedule
- It doesn't require any personal guarantees
Cons:
- Only a few companies, like Ratio, offer true-sale-based financing
5. Crowdfunding
Crowdfunding refers to raising funds through a large number of people. Usually, you'd see it being used for social impact projects, social causes, and fun side projects on Kickstarter, a platform that allows you to raise crowdfunding.
For example, Star Citizen, an in-development multiplayer, space trading, and combat simulation game, raised nearly $300 million through crowdfunding in 2020 and quickly reached the $400 million mark the following year.
Crowdfunding works best for consumer startups as they can leverage massive consumer bases on social media websites for their business.
Pros:
- Introduces you to potential customers
- You don't need to repay the money
- Requires no credit checks
- Very easy to start with due to platforms like Kickstarter, GoFundMe, Indiegogo, etc.
Cons:
- Have to return all the money on not reaching the goal
- Very hard to raise a reasonable amount ($50K+)
- It requires a lot of marketing and hype-building even before getting the money
- Others might potentially steal your idea if it is not protected by patents
Best for: B2C startups developing innovative new products or tools to improve quality-of-life or social impact organizations.
How Can Your Business Get Non-Dilutive Funding?
Ratio emerges as a standout in the non-dilutive funding space, offering a swift avenue to transform recurring revenue contracts into instant cash.
Within Ratio's suite, two products take center stage: Boost, tailored for Revenue-Based Financing (RBF), and Trade, designed for True Sale Based Financing (TBF).
Ratio Boost allows you to provide your customers with a Buy-Now-Pay-Later(BNPL) option, where they can choose from a host of flexible payment plans while you still get upfront capital.
For example, imagine that you run a hardware startup, and you're eyeing a 2-year, $100K contract with a potential client.
However, the upfront cost may pose a financial challenge for them. By leveraging Ratio Boost, you can offer your client the flexibility of manageable quarterly payments, approximately $9K, over the contract's two-year span, with a slight premium for payment flexibility.
On top of that, you receive the entire $100K upfront, providing an immediate cash infusion to fuel your hardware startup's growth.
How Does Boost Work?
Step 1: Sign up on the Ratio app. It's a straightforward process—just input your business details.
Step 2: Once you receive the green light from Ratio's team, integrate Boost into your checkout flow, CRM, or CPQ. Approval/decline takes just 48 hours.
Step 3: Thanks to Ratio's astute underwriting, customers can access BNPL options with personalized quotes and schedules.
Step 4: Ratio provides you with upfront cash!
On the other hand, Ratio Trade allows you to convert future revenues from your assets, including receivables and contracts, into instant cash through a non-debt, non-dilutive true sale, all accomplished without requiring customer engagement.
Imagine you're at the helm of a growing tech firm, holding a portfolio of valuable contracts generating substantial future revenue.
With Ratio Trade, you can swiftly convert these contracts into immediate cash to address pressing financial needs.
This non-intrusive process ensures your company benefits from a true sale without burdening your customers with additional involvement.
Suggested Reading: Raising Capital And Optimizing Structure In The Subscription Economy
How Does Trade Work?
Step 1: Link your bank, financial, and billing systems to Ratio Trade
Step 2: In just 48 hours, Ratio provides a swift decision — either approval or a gentle decline.
Step 3: Share your annual or multi-year contracts effortlessly on the platform.
Step 4: Receive cash offers for each contract
Step 5: Once satisfied, accept the offer and watch the cash reach your account instantly!
Conclusion
Non-dilutive financing is a godsend for small businesses, especially SaaS and hardware companies, looking to grow without giving up control.
You can consider many options, such as venture debt, RBF, TBF, government grants, crowdfunding, etc. However, our pick of the pack would be Ratio’s revenue-based and true-sale-based financing options.
On top of the benefits listed in the previous sections, the Ratio bears all the underwriting risk, enabling your business to grow comfortably without cash flow challenges.
Moreover, Ratio has access to over $400 million for customer financing, so you’ll never run short of cash.
Sign up now and make financing a breeze.
FAQs
What is dilutive and non-dilutive?
Dilutive and non-dilutive are forms of business funding. The former requires you to give up equity, or business ownership, in exchange for funding. Meanwhile, the latter doesn’t require giving up any equity, including grants, awards, loans, revenue-based financing, etc.
What is an example of dilutive funding?
VC funding is an excellent example of dilutive funding. VCs invest money for a stake in your business. You don’t need to pay it back; however, the investors get a say in your operational decisions.
What are some non-dilutive grants available to US based startups?
Non-dilutive grants available to U.S.-based startups include federal programs like SBIR and STTR, SBA grants, and grants from agencies like NIH, NSF, USDA, DOE, and DoD. Additionally, state and local governments, industry-specific organizations, and nonprofits offer grant opportunities to support various sectors and initiatives.
What are the disadvantages of non-dilutive funding?
Some disadvantages include smaller check amounts due to higher risk, the need to pay the money back, the massive competition for specific non-dilutive financing sources like grants, and the fact that they’re generally suited to late-stage businesses.
Check other Frequently Asked Questions (FAQs) about Ratio and its offerings.
