Why Entrepreneurs Should Think About Non-Dilutive Funding
Every month, hundreds of entrepreneurs just like you are searching for the answer to this question:
What is non-dilutive funding and why is it important?
In a nutshell, non-dilutive financing is any type of fundraising that doesn’t require you to give up any ownership (shares, equity, etc.) of your company. Examples of non-dilutive funding options would be things like bank loans (which require monthly payments) or revenue sharing agreements (which require allocating a percentage of your monthly revenue to pay back that investment).
However, it’s easier to understand the value of non-dilutive funding options when you fully understand your dilutive funding options first.
Let’s dive in.
Dilutive funding commonly requires that an entrepreneur give away a portion of their business to secure capital. For example: A potential investor will give you the funding that your business needs, but they want 25% of your lifetime business profits in exchange. They’re taking an immense risk by handing over all that cash, so it’s understandable that they want a slice of the pie in return.
But dilutive funding options come with far more baggage than that. By giving away equity in your company, you’re also giving away some control of your company. That investor that now owns 25% of your startup will want to have their voice heard when making company decisions. While this might not be the worst-case scenario depending on who you partner with on the investment, it’s still an important factor to keep in mind.
And while the investor you partner with is willing to take on that high risk, it’s also essential to factor in that they’re going to want their investment back quickly. Going this route with dilutive funding might mean that you’re required to show rapid growth in your business over a short period of time — something that your business may not be able to accomplish comfortably.
Think of non-dilutive funding as a way for your new startup or small business to gain capital with very few strings attached. Forget about worrying about what your angel investor thinks you should be doing to grow your business or paying your investor back in a short amount of time. Non-dilutive funding gives you a chance to grow your business sustainably while retaining full control.
Some examples of non-dilutive funding include:
- Loans from family or friends
- Grants and licenses
- Startup competitions and other awards
- Crowdfunding: Raising small amounts of money online from several individuals
- Tax credits: Refundable credits (cash refund after paying tax owed) or nonrefundable credits (income tax with a direct cash infusion)
- Revenue-based financing: Investors provide your company with capital in exchange for a percentage of monthly revenue as a return on their investment
As a new entrepreneur, non-dilutive funding options should absolutely be top of mind. You won’t lose any stake in your business. You won’t have to answer to an investor when it comes to critical business decisions. You won’t be held to a deadline when it comes to growing your business and increasing your sales revenue, either.
Finding funding for your new business or startup is hard, which is why it’s crucial to understand which type of funding is right for you. Start with these fundamentals to get to the bottom of what funding your business really means:
- Explore common business funding options, objectively assess the net benefits of each, and determine which options are worth exploring further in our Basics of Business Funding training.
- From Kickstarter 101 to determining how much money you need to raise to get your business off the ground, the Success in Business Podcast covers the financial questions every budding entrepreneur has in common.
- Everyone is familiar with brick-and-mortar bank loans, but here are six other funding options that you may not know of (and how to tell if they’re a good fit for you!).