What is non-dilutive funding? Options, benefits, and different types

Do you want to retain full ownership and decision-making power while you secure the resources to scale? Non-dilutive funding might be the answer you've been searching for.

You're building something special – a business with real potential. But funding those ambitious plans? That's where things can get tricky. Traditional investors often shy away from early-stage companies, demanding a hefty chunk of your hard-earned equity in return.

Securing the right kind of financing is critical for any growing business. In fact, the Bank of America Institute's 2024 Business Owner Report found that 93% of mid-sized business owners plan to obtain financing for their business to invest in new technology and equipment, or expand operations. If you're looking for funding options that won't dilute your ownership, non-dilutive financing is worth exploring.

In this article, you’ll learn what non-dilutive funding is, its unique benefits and drawbacks, and the different types available to businesses.

What is non-dilutive funding?

Non-dilutive funding is a way for businesses to secure capital without giving up equity or control, unlike traditional investments from venture capitalists or angel investors. Instead of selling shares, companies can access financing through options like loans and grants, allowing them to grow while retaining full ownership.

This type of funding is attractive to startups and growing businesses that want to maintain control over their company's direction, decision-making, and future profits. While non-dilutive funding typically involves repayment or specific requirements, it allows entrepreneurs to scale their businesses without reducing their ownership stake.

Non-dilutive funding examples

Imagine you've built "Fresh Start," a food startup crafting delicious, nutritionist-approved meals, from the ground up. You're passionate about your unique approach and eager to expand, but giving up control to outside investors just doesn't feel right. That's where non-dilutive financing comes in.

Instead of selling equity stakes in your company, you could secure a business loan to open a new kitchen or partner with a revenue-based financing provider to fuel your operational growth. This way, you access the capital needed to grow "Fresh Start" while retaining full ownership and decision-making power – ensuring your vision for healthy, convenient meals stays intact.

Now, take a look at another example of non-dilutive funding.

Let’s say you run "Global Goods," a company that imports handcrafted home décor items from artisans in Southeast Asia and sells them to retailers in North America. 

You've secured a large order from a major home décor chain, but there's a snag: the retailer has a 120-day payment term. You need to pay your artisans upfront to start production, but waiting two months for payment puts a strain on your cashflow.

So you partner with an invoice financing company and "sell" them the invoice for a percentage of its value (e.g., 90%). They provide you with the funds upfront, minus their fee. When the retailer pays the invoice in 120 days, the invoice financing provider receives their share, and you receive the remaining balance.

This way, Global Goods can fulfill large orders and manage cashflow more effectively, even with lengthy payment terms. It keeps the supply chain moving and allows for continued growth without requiring equity dilution.

Dilutive vs. non-dilutive funding

The major difference between dilutive and non-dilutive funding is that in dilutive funding – as its name suggests – a company reduces the value of its existing shares by relinquishing them to investors in return for capital. It's a trade-off: more money, but less control.

Non-dilutive funding, on the other hand, lets you access capital while retaining 100% ownership. Your company, your rules. This makes it the perfect choice for startups that:

• Value autonomy: You call the shots, from product development to strategic direction. No investor interference
• Have a clear path to profitability: You're confident in your ability to repay loans or cover expenses through revenue, not future equity stakes
• Want to build long-term value: By avoiding dilution, you retain a larger share of your company's future success

Non-dilutive capital empowers you to grow on your terms, without compromising your vision.

Benefits of non-dilutive funding

For those able to qualify for a non-dilutive funding agreement, there are a range of advantages and disadvantages.

What are the pros of non-dilutive funding? 

Full control

With non-dilutive capital, a business retains full control without diluting shares to investors. This means that businesses funded this way don't need to answer to investors and have creative control and autonomy over key decisions.

Future profit stays within the company

When there are no outside investors diluting shares, most of the profit stays within the company and can be directed toward actions that can grow the business.

Less business strain

Interest payments are tax-deductible which helps offset some of the financial strain put on a business during its initial period. This also takes stress off business owners, allowing them room to financially maneuver and grow the business.

What are the cons of non-dilutive funding?

Ongoing debt obligations

Despite not diluting a business share, the company isn't completely devoid of obligation. Many lenders can hold businesses accountable through regular interest payments on loans. 

It's important to understand the extent of any debt that needs to be paid so that a company doesn't end up behind on interest rates that may result in expensive repercussions.

Long application process

Another disadvantage of non-dilutive financing is the lengthy application process, which also may require endorsement from a third party to be considered. If part of the paper trail seems out of place, this could also set a company back months. This is why it's always important to prepare any documentation in advance.

Lender accountability

While non-dilutive funding prevents outside investors from gaining a percentage stake in a business, that doesn't mean that a business is completely unanswerable to lenders. 

Those who invest in a business through non-dilutive means will have expectations in exchange for their funding, and loans will still need to be repaid

Suitability varies

Different businesses benefit from unique funding alternatives. While non-dilutive funding might work for a company with the ability to pay back interest loans, others may struggle to access the initial industry connections and capital projections needed to secure funding.

Different types of non-dilutive funding

Non-dilutive finance covers a range of financial options that offer access to capital without requiring the business to relinquish shares.

Below, you’ll find the most common types and how they work.

1. Venture debt

Venture debt is a form of debt financing that is only available to venture-backed startups – those that have received funding from venture capitalists.

This type of non-dilutive funding is often reserved for companies that are small and can't offer a percentage in company shares or receive funding from bank loans.

Despite its name, venture debt funding isn't issued through venture capital firms themselves, but by a specialized debt lender, such as banks, private equity firms, hedge funds, or business development companies. These lenders use the initial backing of the venture capital firm as a sign of trustworthiness that the business is viable and can repay its debts.

Learn more: What is debt financing? How does it work?

2. Small business loans

The idea of taking a small business loan is a familiar concept to most entrepreneurs. However, those present some unique differences.

The lender will still check a business owner's credit score, however, what's more important is the balance sheet and income statements of the company. Lenders will want to know whether a business can even pay a loan back and interest rates may vary wildly depending on what they find.

Usually, these loans have a longer period in which to be paid back – roughly three to five years. Since small business loans are generally considered long-term debt, they can be recorded as liabilities on an income statement before calculating any tax liability.

3. Crowdfunding

Crowdfunding is a way of raising money for a business by collecting it from many people, typically through online platforms. It’s often used by startup companies that are looking for a solid cash injection to get their business up and running – with these companies often providing a product or service.

Crowdfunding isn't always viable as it relies heavily on public interest. So it's better for companies that are selling a product the public may be interested in, like a new board game, a quality-of-life invention, or a useful piece of software.

These kinds of businesses are often at the mercy of their large backer base. When a company doesn't deliver on its promises it could damage its reputation and harm any further profit.

4. Invoice factoring

Invoice factoring is a non-dilutive capital option as businesses effectively ”sell” their unpaid invoices to factoring providers – meaning they do not relinquish any shares in exchange for liquid capital.

In an invoice factoring agreement, businesses working with delayed payment terms upload their unpaid invoices and access up to 90% of the value in liquid capital immediately. The factoring company then “owns” the invoice and receives the full client payment upon expiry of the delayed payment terms.

Invoice factoring is a popular choice as businesses only access funds that they are already owed, so there are no long-term repayment obligations like those required in traditional loan agreements.

Read more: How can small businesses access invoice financing services?

5. Merchant cash advance

A merchant cash advance (MCA) is a funding option in which a business accesses liquid capital in exchange for a percentage of future debit and credit card sales as repayments. 

The specific terms of an MCA, such as the repayment percentage and duration, vary depending on factors like the amount borrowed and the company's sales history. Stronger sales often translate to more favorable terms.

A company must have a proven track record in historic sales before it can apply for an MCA. This alternative business financing is beneficial for companies that have a high volume of sales, as it means lenders will receive those sales percentages faster.

Short payment terms are the main selling point of an MCA, allowing a company to pay back a loan with each day of sales. It’s a great type of funding for securing smaller loans.

6. Grants

Grants are the most sought-after form of non-dilutive funding but also the most challenging to secure. The allure is clear: grants don't require repayment. 

While most common in the non-profit sector, it's certainly possible for small businesses to receive grants, especially those with innovative ideas or operating in sectors the government wants to support.

Specific commerce organizations and government agencies handle grant applications, varying by country and industry. The application process can be competitive, requiring detailed proposals and demonstrating a clear need for funding.

This type of money lending was prevalent during the post-COVID era when small businesses were trying to get back on their feet. Unfortunately, this has also created a drought in grants being offered to companies.

7. Revenue-based financing

Revenue-based financing is a non-bank credit option in which a company pledges a percentage of its future revenue – rather than shares – in exchange for capital investment.

This form of financing can be useful for businesses with a high volume of profit from sales. Since they generate significant revenue, a percentage taken as repayment is less likely to impact their overall performance. The injection of up-front capital can be essential for their long-term business growth.

Ditch the equity trade-off: Is non-dilutive financing right for you?

There are plenty of paths to funding small businesses, but not all are created equal. While equity financing (dilutive funding) – trading ownership for capital – might seem like the default, it's not the only option. And let's be honest, wouldn't you rather keep what you've built?

Non-dilutive funding offers a powerful alternative, allowing you to fuel growth without sacrificing control. It's the best choice if you:

• Prioritize ownership: You've built this business from the ground up. Keep it that way
• Are confident in your revenue: Cashflow is strong, and you're ready to leverage it for even bigger wins
• Seek funding flexibility: New equipment? International expansion? It's your call – use the capital how you need it

Ready to explore a world of funding possibilities beyond the boardroom?

Stenn is the next-gen capital platform built for businesses like yours – those operating in international trade, eCommerce, and digital services. We move as fast as you do, with non-dilutive funding alternatives that include:

• Revenue-based financing: Unlock future revenue and put it to work – marketing, inventory, you name it. It's your call
• Invoice financing: Get paid faster and say goodbye to those 120-day waits. Capitalize on opportunities the moment they arise

Get funded sooner. Grow faster. Contact Stenn today.

Non-dilutive funding: Frequently Asked Questions (FAQs)

Does dilution hurt shareholders?

When a company has its shares diluted, it gives up a percentage of ownership and equity to external stakeholders. This reduces the overall control the original shareholders have over the business and the potential profits available when they come to cash in or sell up. 

Is venture capital non-dilutive?

Venture capital can be non-dilutive, offering a company a fixed-interest loan instead of taking a percentage of shares in that company. While it's non-dilutive that doesn't mean a business is free of all obligations to that venture capital firm. They still reserve the right to force a business into bankruptcy to regain their loan if that company cannot pay back the loan.