Non-Dilutive Funding: What Is It and How Does It Work?

A few years ago, I worked with a small biotech company on the brink of a breakthrough. They were looking for substantial funding to complete their research but they didn’t want to give up shares in their company in the process. That’s when I told them: why don’t you look into non-dilutive funding? 

So, by securing a combination of government grants and royalty financing, they funded their project without giving up any equity.

As a finance professional with more than 20 years of experience, I’ve seen multiple companies reach previously unattainable heights thanks to non-dilutive financing. In this blog, we explore what non-dilutive funding is, how it works, and the pros and cons of its various forms.

What is Non-Dilutive Funding?

Non-dilutive funding is a type of financing where companies receive funding without giving up any ownership of their company. Unlike dilutive funding, where investors receive a portion of the company’s ownership in exchange for their capital, non-dilutive funding allows you to keep full control over your business.

This type of funding is particularly attractive because it shields your stake in your company while providing the necessary financial support to grow and expand your business. Businesses looking to leverage non-dilutive funding have a wealth of options to explore. While we will cover each type of non-dilutive funding option in more detail below, common options include debt-based loans, grants, invoice financing, and more. 

How Does Non-Dilutive Funding Work? 

The principle of non-dilutive funding is straightforward – providing financial resources to businesses without requiring equity in return. 

To qualify for non-dilutive funding, businesses typically need to demonstrate creditworthiness, operational history, and financial health. Lenders or grant agencies require comprehensive documentation to assess these aspects, including business plans, financial statements, proof of concept, and detailed project proposals.

The financing request process usually starts with the submission of detailed application forms along with these documents through online platforms. The review phase varies and may take up to several weeks. If approved, the funds are earmarked for particular uses, such as research and development, scaling operations, or enhancing production capacities. 

For loans, the repayment terms are agreed upon at the start of the funding period. Grants do not require repayment, but they do require rigorous periodic reporting to ensure the funds are used as intended.

Dilutive vs. Non-Dilutive Funding: What’s the Difference?

Now, if you’re still wondering what is the main difference between dilutive vs. non-dilutive funding, the table below clarifies the main factors:

Aspect	Dilutive Funding	Non-Dilutive Funding
Brief Description	Funding is contingent on giving away a portion of your company’s ownership stake.	Provides funding without requiring any equity or ownership sacrifices.
Types of Funding Options	– Venture capital – Angel investments – Equity crowdfunding	– Grants – Debt financing – Royalty financing – Invoice financing
Pros	– Access to significant capital – Potential strategic partnerships – Can accelerate rapid scaling and growth	– No equity sacrifices – Less long-term financial commitment – Flexible repayment
Cons	– Loss of equity – Potential loss of control over business decisions – Dilution of existing shares	– Often tied to specific project conditions – May not cover all funding needs – It may be harder to quality

Different Types of Non-Dilutive Financing

Each type of non-dilutive financing caters to different needs and offers different benefits. So, before you see which one suits your business best, take time to research these financing avenues. I’ve compiled a comprehensive guide as a starting point for some of the most common types below:

Debt-Based Loans

With debt-based loans, businesses borrow money from financial institutions like banks, online lenders, and credit unions without having to sacrifice any equity. If approved, the company can receive a lump sum of financing that can be used for any business-related expenses. Typically, debt-based lenders don’t put any limitations on how the funds can be used. 

Instead of equity in the company, the lender will require repayment of the principal plus interest in installments or as a lump sum. Common types of debt-based funding include:

• Merchant cash advances: This type of funding provides businesses with a lump sum of capital in exchange for a percentage of future sales. It is often used by businesses that need quick access to cash and expect a high volume of sales transactions.
• Startup loans: Specifically designed for those planning to start a new business, startup loans provide the necessary funds to get operations off the ground. These loans typically have more flexible eligibility criteria to accommodate the limited business credit and operational history of the new company.
• Small business loans: These are traditional loans used to finance all kinds of business-related expenses, including salaries, inventory, and marketing costs. They come with fixed interest rates and repayment terms and are suited for established businesses looking to expand or manage cash flow.
• SBA loans: Partially backed by the government, these loans offer favorable terms like lower interest rates and longer repayment periods. SBA loans can be a great fit for businesses that might not qualify for traditional bank loans.
• Equipment financing: This loan type is specifically meant to purchase equipment. Businesses receive funds to buy necessary machinery or technology, and the purchased equipment often serves as collateral for the loan.

Many debt-based lenders require a minimum business credit score of  690. If your business qualifies, the lender may extend loans ranging from a few thousand dollars to six figures based on creditworthiness and financial stability. Average interest rates range from 6% to 12%, with loan terms of three to ten years. For larger financing amounts, the lender may require collateral in the form of equipment or real estate. 

Invoice Financing

Does your business invoice its customers? Did you know that you could use your outstanding invoices as a non-dilutive funding option? With invoice factoring, you sell your accounts receivable invoices in exchange for cash. While you won’t receive the total amount, you can get between 70% to 90% of the invoice amount.

Here’s how it works:

• Your business sells its outstanding invoices to a finance provider at a discount
• The lender advances a significant portion of the invoice’s face value upfront, typically 70% to 90%
• Once the client pays the invoice, you receive the remaining amount minus a fee for the financing service. This fee is usually a small percentage of the invoice total, depending on the terms negotiated.

The main benefit of invoice financing includes quick access to working capital without waiting for clients to pay their invoices. The creditworthiness of the business is also not a concern itself. 

And, of course, invoice financing does not require giving up a stake in the business. 

On the other hand, while it can be a quick source of capital, the financial benefit is contingent on clients paying their invoices. Late payments can compromise the overall effectiveness of the funding.

Grants

If your business is looking for non-dilutive and non-debt-based financing options, you can explore grant options. Grants are provided by local, state, and federal governments, private foundations, and nonprofit organizations. The best part about non-dilutive grants is that they require no repayment, and you give up absolutely no equity.

However, most grants are awarded for specific purposes and are often limited in their use. Non-dilutive grants are often given for the following purposes:

• Economic growth: aimed at boosting small businesses in underserved or economically disadvantaged communities
• Innovation: supports the research and development of new technologies, products, and services in the technology, healthcare, and environmental science industries
• Public benefits: focused on projects promoting renewable energy, conservation efforts, and other initiatives that benefit the environment
• Sector-specific support: aids the agricultural and manufacturing industries to promote growth and sustainability

To find suitable grants, check out online databases like Grants.gov and Candid.org. Additionally, many state and local governments have their own grant programs, often listed on their official websites.

While non-dilutive grants are beneficial in funding mission-critical projects without giving up ownership or incurring debt, competition is very high.

Royalty Financing / Revenue-Based Financing

Businesses that have high transaction volumes, especially during specific seasons, may opt to leverage their future revenue for upfront financing. Royalty or revenue-based financing allows your business to borrow a lump sum of money from the lender and pay it back over time from future sales. 

Here’s how it works:

• If your business is approved for royalty financing, you’ll receive a lump sum amount from the lender 
• Every month, the lender will take a percentage of the company’s gross revenue. Keep in mind the repayment amount will fluctuate based on your sales volume
• In addition, the business will pay an additional sum, which is a multiple of the original investment (1.5 to 2.5 times the initial investment amount). This additional sum acts like traditional interest and is predetermined in the financing agreement

The primary benefit of royalty financing is its adaptability to the business’s revenue fluctuations, which can ease the financial burden during lower sales periods. However, this financing option can exacerbate slower seasons because the lender has priority over your revenue.

Pros and Cons of Non-Dilutive Financing

As with all financing options, non-dilutive funding comes with its set of advantages and drawbacks.

Let’s break down the main pros below:

• No Equity Sacrifice: Business owners retain complete control of the company. The investor or grantor typically gives the money without taking any ownership shares – they only expect repayment.
• Less Long-Term Financial Commitment: When businesses take on non-dilutive funding, they typically agree to a predetermined repayment schedule. This means you will have a limited relationship with the investor for only the life of the loan. Once you repay the loan and fulfill the contractual obligations, the financial relationship ends.
• Credit Building: Since debt-based loans are reported to credit bureaus, they can help establish and grow your business credit profile. By making repayments on time, you can establish yourself as a creditworthy and reputable company, which will be helpful for future funding applications. However, non-dilutive grants don’t have any effect on your credit.
• Faster Funding Process: Non-dilutive funding is relatively easier and quicker to receive than traditional financing options. This can provide much-needed capital to your business in a shorter time period, allowing you to seize opportunities and accelerate growth.
• Broader Accessibility: Non-dilutive funding is more inclusive of startups with little or no credit and operational history, making it available to a wide range of companies. This inclusivity supports innovation and growth across multiple sectors by giving opportunities to those who might not meet traditional funding requirements.

On the other hand, the challenges of non-dilutive funding include:

• Usage Limitations: Funds often come with limits on how you can spend them, typically ensuring that the money is used for specific purposes related to business growth. This can limit your flexibility in allocating these resources to other projects.
• Complex Application: The process can be lengthy and resource-intensive. Most lenders or granters thoroughly inspect your proposals, financial documentation, and your project’s impact.
• Insufficient Funding Amounts: Some funding sources that do not require repayment, like grants, are often not available in large amounts. This can make it difficult to secure substantial capital through this route, and many business owners have to simultaneously look for other funding avenues.
• Delayed Funding: The time to secure funding can also be lengthy, reaching a few weeks. This can impact the project timelines and potentially cause missed opportunities.

Is Non-Dilutive Funding Right For Your Business?

The decision between dilutive and non-dilutive funding is more than just numbers. It’s about understanding what aligns best with your vision for your company’s future. Non-dilutive funding can particularly benefit young or rapidly growing startups where maintaining control is a priority. If keeping ownership and having the ability to make unhindered decisions is important for you, then you should consider the non-dilutive route. Furthermore, non-dilutive funding can be a lifeline for businesses facing financial difficulties or at risk of bankruptcy, as it provides necessary capital without adding to the debt burden.

On the other hand, dilutive funding, such as venture capital, can be a good option for businesses looking to rapidly scale and expand their operations. This type of funding can provide larger amounts of capital upfront. Additionally, investors may bring valuable expertise, connections, and resources to help your business grow. So, if you value these over fast funding and ownership control, you might want to look at dilutive funding instead.

Final Thoughts

As we wrap up, remember that non-dilutive funding can be a great way to fuel growth without sacrificing equity. However, keep in mind that this type of financing often comes with restrictions that can guide how funds must be used. Keep your business’s long-term goals at the forefront of every decision and make sure that whatever type of funding strategy you choose aligns with your business’s repayment capabilities.