Non-dilutive financing refers to methods of raising capital that do not require giving up ownership or control of a company.
As opposed to traditional venture capital investments or angel funding, non-dilutive funding allows entrepreneurs to retain control, flexible cash flow, and ownership incentives. It’s an attractive financing option for getting a business off the ground or funding growth once revenue starts coming in.
Why Non-Dilutive Financing?
There are several reasons why startup founders and small business owners prioritize non-dilutive forms of financing:
1. Preserve equity and control – Non-dilutive funding means no ownership shares change hands in return for capital. Founders can maintain higher percentages and voting rights.
2. Increase exit value – By avoiding dilution early on, entrepreneurs retain a bigger slice when exiting or going public down the road. Minority stakes lose tremendous upside.
3. Maintain incentives – Founding teams receive less benefits from growth and revenue when ownership is diluted early. Non-dilutive funding better aligns incentives.
4. Flexible terms – Non-dilutive financing often comes with fewer restrictions, shareholder rights, collateral obligations, and covenants. Ownership control is preserved.
5. Repeat financing – Many non-dilutive options can be re-secured multiple times without ownership adjustments, unlike VC rounds which require new equity allocations.
Prioritizing non-dilutive funding can be pivotal for founders in the early days of raising capital to get startups off the ground. Let’s explore some of the most popular and accessible options available.
Types of Non-Dilutive Financing
There are a variety of non-dilutive financing options that allow startups and small businesses to access capital without giving up equity. The most common and effective sources include:
- Debt Financing Instruments
- Government Grants
- Revenue-Based Financing
- Purchase Order Financing
- Accounts Receivable Financing
- Leaseback Financing
- Trade Credit Financing
- Equity Crowdfunding
I’ll provide an overview of how each instrument works, their unique pros and cons, typical eligibility requirements, and the process to secure the financing.
Let’s explore them in more detail:
Debt Financing Instruments
Debt financing refers to capital provided in exchange for a borrower’s obligation to repay on a fixed schedule. The primary debt financing instruments used by startups as non-dilutive funding are:
- Business Loans
- SBA Loans
- Microloans
- Credit Cards
- Convertible Notes
- Friends & Family Loans
These debt instruments allow capital to be infused into the business without giving up equity or ownership control.
Pros
- Don’t give up ownership or control
- Set repayment terms
- Typically easier to qualify
Cons
- Accumulate debt that must be repaid over time
- Interest costs accrue
- Lenders may demand collateral
- Fixed repayment schedules
Eligibility
- Varies by lender
- Minimum time in business + revenue
- Personal credit scores inspected
- Collateral often required
How to Get Approved
- Identify lender offering best rates + terms
- Submit loan application with business financials
- Provide personal + business tax returns
- Be prepared to offer collateral
- Accept loan terms + draw down capital
Government Grants
Government grants represent financing provided by federal, state, or local agencies that does not require repayment or equity. Grants are issued to qualifying businesses, typically for economic and workforce development initiatives.
While highly attractive due to not requiring repayment or dilution, government grants have extensive eligibility rules and are subject to laborious applications with no guarantee of success. Key grant types include:
- SBA Grants
- State & Local Grants
- R&D Innovation Grants
- Minority & Women Grants
Pros
- Non-repayable capital infusion
- No equity sacrificed
- Funds can be used flexibly
Cons
- Highly competitive + intensive applications
- Limited eligibility qualifications
- Funds restricted to approved uses
- Complex compliance + reporting
Eligibility
- Location, industry, entity structure limits
- Operational history + track record
- Use of funds for approved objectives
- Disadvantaged status priorities
How to Get Approved
- Research catalogs of available grants
- Determine eligibility + objectives
- Complete lengthy applications
- Get endorsements from stakeholders
- Rally political support from representatives
While non-dilutive, competitive government grants are extremely hard to secure. Navigating eligibility constraints, complex processes, and low award rates takes tremendous effort even for qualified recipients.
Revenue-Based Financing
Revenue-based financing (RBF) offers capital to startups and small businesses in exchange for a fixed percentage of future revenue until the money is paid pack with interest. As opposed to equity stakes or set loan repayments, the financing is tied directly to top-line revenue growth.
RBF is sometimes structured as a royalty arrangement up to a fixed cap or for a set duration of time. There are also hybrid approaches combining RBF with equity warrants or collateral requirements. Leading revenue-based financing firms include:
- Lighter Capital
- Fleximize
- Upcap
- Decathlon Capital
Pros
- No equity provided to investors
- Flexibility to pay more when revenue is higher
- Funds usable for working capital needs
- Interest accrues instead of compounding
Cons
- Expensive capital with premiums vs loans
- Requires significant minimum monthly payments
- Firms take heavy transaction fees off the top
- Contracts can span years
Eligibility
- Minimum 12 months operating history
- $250k+ in revenue
- 5%+ net margins
- Credible growth projections
How to Get Approved
- Submit revenue figures + financials
- Provide sales forecasts + growth plans
- Be prepared to personally guarantee
- Expect extensive due diligence
- Comparison shop investor terms
For eligible businesses already seeing revenues, RBF represents a viable non-dilutive financing path to fund growth without loans or equity. Just be prepared to pay expensive premiums in exchange for the flexible structure.
Purchase Order Financing
Purchase order (PO) financing provides capital to fulfill confirmed orders by scaling production and inventory. Startups use PO financing to fund inventory and hire staff without equity dilution to fulfill large purchase orders from major customers.
As opposed to a business loan that offers an untethered lump sum, PO financing delivers specific capital against real orders in hand.
Pros
- Funds tied directly to POs
- No equity dilution
- Interest accrues when order is fulfilled
- Payments come directly from customers
Cons
- Requires confirmed POs in place
- Short-term solution to fill orders
- Expensive rates and fees
- Significant minimum PO values
Eligibility
- 1 year operating history
- $250k+ revenue
- Strong credit history
- PO from reputable buyer
How to Get Approved
- Present PO documents to lenders
- Share business financials + tax returns
- Get purchase orders from buyers
- Expect personal credit checks
- Advance can be secured in days
For startups with major confirmed orders from clients in hand, PO financing represents a strategic non-dilutive option to secure the capital required to manufacture, pay suppliers, and fulfill demand.
Accounts Receivable Financing
Accounts receivable (AR) financing allows capital to be secured leveraging unpaid customer invoices as collateral. It delivers working capital based on money contractually owed to a company by clients awaiting collection.
AR financing helps solve cash flow gaps for startups delivering products/services to clients with net payment terms. Approval is based more on the strength of receivables versus company financials.
Pros
- Uses AR as capital backing
- No requirement to dilute equity
- Pay back revolving balance over time
- Cheaper financing than loans
Cons
- High transaction/processing costs
- Requires strong AR portfolio + clients
- More expensive than standard debt
- AR turnover can impact availability
Eligibility
- 1 year operating history
- $250k+ AR outstanding
- Mix of private + public clients
- 25%+ annual revenue growth
How to Get Approved
- Submit 2 years financial statements
- Share details of AR amounts pending
- Provide details + history of clients
- Set schedule for AR rolloff + payments
- Set usage + cost terms for capital
For asset-light companies awaiting client payments, tapping into those outstanding AR balances via credit lines represents accessible expansion capital that avoids dilution. The key dependency is having strong customer receivables.
Leaseback Financing
With leaseback financing, a company sells corporate real estate, machinery, equipment, or other fixed assets to an investor and immediately leases them back to finance growth without dilution. It converts equity in assets to usable working capital.
Leasebacks provide non-dilutive capital while still allowing the assets to be utilized by the company.
Pros
- Convert assets into capital
- Retain ability to use assets
- Governed by leasing contract
- Pay lease amounts over time
- Suitable for equipment + property
Cons
- Requires having eligible assets
- Forfeit potential asset appreciation gains
- Lease payments do accrue
- Can be expensive way to access capital
- Tangles up assets contractually
Eligibility
- Strong corporate credit
- Significant fixed assets to sell + lease
- Assets must have transferable titles
- Current assets marked at attractive valuations
How to Get Approved
- Identify assets for potential leaseback
- Get appraisal/valuation from accredited professionals
- Competitively shop multiple leaseback investor bids
- Finalize sale-leaseback contract and financing
- Transfer title and leaseback assets
For asset rich companies, leaseback agreements can offer an alternative way to tap into the appreciating value of unencumbered equipment, property, and other fixed assets to raise non-dilutive working capital.
Trade Credit Financing
Trade credit financing allows businesses to receive inventory supplies from vendors upfront without immediately paying for them. Firms take on “open account” trade liabilities with extended payment net terms enabling more working capital. Some companies offer credit terms stretching 60-90 days or more. Trade credit is an accessible source of finance (via vendors) by exploiting pricing advantages larger companies enjoy to get the best deals from suppliers. They buy in bulk and often pay the lowest costs which allows more room to make profits and the option of offering some inventory on credit terms to smaller businesses.
Leveraging trade payables this way unlocks free non-dilutive financing usable as floating working capital to cover operating expenses while waiting on inventory to sell through.
Pros
- Frees up cash flow to operate
- No collateral or equity required
- Extended repayment timelines
- Pay only after inventory sells
- Cheapest cost of capital
Cons
- Requires qualifying for supplier programs
- Need good personal credit history
- Caps on total financing amounts
- Vendors expect payments reliably
Eligibility
- Operational multi-year track record
- Good business + personal credit
- Loyal repeat purchasing history
- Ability to consistently resell + collect profits to repay
How to Get Approved
- Identify vendors with eligible credit programs
- Submit business/financial details for application
- Get approved for extended trade account
- Make regular bulk purchases, sell + collect profits
- Remit scheduled payments to suppliers
Accessing open trade accounts and strategically leveraging trade payables offers an organic way for startups and small businesses to unlock working capital without diluting equity. As your company and purchasing volumes grow over time, this readily available financing source scales as well.
Equity Crowdfunding
Equity crowdfunding platforms allow startups + small businesses to raise early-stage capital by issuing shares through online public offerings. Investors receive equity ownership in exchange for funding infusions.
Unlike donation crowdfunding models like Kickstarter and Indiegogo, equity platforms help privately-owned entities access seed capital in a more scalable, regulated public market.
For startups raising money via equity crowdfunding, smaller average investment checks from many investors means giving up less equity control than institutional VC rounds.
Pros
- Access small investments from many public investors
- No fixed repayment obligations
- Leverages digital marketing to scale capital raising strategy
- Automates administrative tasks to manage shareholders
Cons
- Still requires giving up equity stakes
- Lots of smaller investors leads to “too many cooks in the kitchen” with managing communications, governance voting procedures, onboarding atypical investors onto capped tables.
- Land grab for best companies results in adverse selection
- Follow-on growth rounds can be more complex
Eligibility
- Business entity incorporation documents
- Trustworthy founders with clean backgrounds
- Traction signals like product demos, revenue figures or trends, projections
How to Get Approved + Raise Funding
- Submit company, product, team application details for listing approval
- Create investment profile, messaging, media marketing assets
- Market public offering to audience + followers
- Get community to invest to hit funding target maximum by deadline
Equity crowdfunding diversifies traditional capital raising away from single institutional equity check writers, effectively distributing smaller ownership pieces across wider access to capital. For many, surrendering 10-20% early for seed funding is worthwhile, especially if follow-on rounds limit dilution down the road.