Last Updated on November 3, 2023
Few things are more important for a business than ensuring it has enough funding for its operations, evidenced by financing difficulties being cited as the top reason why businesses fail. To maintain financial health and improve cash flow, business owners often turn to secondary sources to obtain additional funding, often through what is called non-dilutive funding.
The type of financing you obtain can play a major role in how you run your business in the future, so it’s essential to understand the difference between dilutive and non-dilutive funding prior to making financing decisions. Read on as we compare dilutive vs. non-dilutive funding and break down the latter even further.
What Does Non-Dilutable Mean?
First, it’s helpful to understand what it means when something is “non-dilutable.” To dilute something means to make it thinner, or to weaken, diminish, or lessen it. When obtaining funding, certain types of financing can actually dilute — or weaken or lessen — your ownership or equity in the business.
Therefore, when something is non-dilutable, it means it won’t weaken or alter your current position.
What Is Non-Dilutive Funding?
With the definition of non-dilutable in mind, non-dilutive funding refers to any type of funding that won’t dilute your ownership or equity in the business. Even though you are receiving financing assistance, you maintain total control over how you run your business. You maintain all of your equity in the business, which means you will also keep any long-term value you build from growing your company.
Dilutive vs. Non-Dilutive Funding
Weighing the pros and cons between dilutive vs. non-dilutive funding is essential as you seek financing for your business. The key difference to consider with dilutive funding is that you will give up a percentage of your ownership.
Dilutive capital is usually obtained via different types of equity financing. You don’t repay the capital that you receive but will instead pay dividends to those who invested in your business. Common sources of dilutive financing include angel investors, small business investment companies, venture capital firms, and initial public offerings (IPOs).
These types of funding don’t increase your business risk and can help you raise more money faster. You don’t even have to repay the cash you receive.
However, investors and shareholders will now have partial ownership of your company. In some cases, this could lead to conflict over how to run the business. And long-term, you will need to share your profits.
Non-dilutive financing is usually harder to obtain because it generally involves obtaining a loan or using another form of credit. Businesses may not be able to qualify for as much funding, as lenders will carefully evaluate their credit history and perceived ability to repay. The loans generally represent an added risk for the business, since they must repay the funds — though not all forms of non-dilutive funding require repayment. However, keeping full ownership can be a worthy long-term tradeoff.
One solution is looking at alternative financing options, many of which fall under the umbrella of non-dilutive financing but not under the umbrella of loans, meaning you won’t have funds to repay.
Examples of Non-Dilutive Financing
The following are some of the most commonly used types of non-dilutive financing in today’s market.
Invoice factoring is a form of alternative financing in which a company sells its outstanding invoices to a factoring company (a “factor”).
Once you determine which and how much of your receivable you’re going to factor, the factoring company provides an immediate cash advance, usually worth between 80% and 90% of the invoice value. Then, once your customer submits invoice payment to the factoring company, the factor releases the remaining amount to your business, minus a small factoring fee.
Factoring is one of those aforementioned non-dilutive financing options that is not a loan, so you don’t have to worry about repaying down the road. That’s why it’s a particularly intriguing choice for small business owners or any business that doesn’t qualify for a traditional bank loan.
Crowdfunding can be considered non-dilutive funding when backers aren’t offered equity in exchange for their donations. Crowdfunding relies on raising small amounts of money from a wide number of individuals. Businesses often offer exclusive products or discounts in exchange for donations, rather than equity.
Venture debt is a special type of debt financing that is made available to startups that have received backing from a venture capitalist. The capital is issued by a bank, private equity firm, or hedge fund that specializes in venture debt lending. Venture debt is usually used to further fund the company’s growth after it has already received initial investments.
Traditional small business loans are among the most common non-dilutive funding options. Banks, credit unions, and other lenders provide loans with lending amounts and payment terms based on your credit history and revenue generation. Non-dilutable loans can be relatively inexpensive for businesses with strong credit and assets, but they can be difficult to obtain for pre-revenue startups.
Government and nonprofit organizations, as well as businesses, provide grants to specific types of businesses and industries. These grants are given as a cash award that does not need to be repaid, though businesses must meet specific criteria to qualify.
Non-Dilutive Funding: Related Terms to Know
When it comes to evaluating dilutive and non-dilutive funding options, there are other important terms business owners should be aware of. Understanding these terms can help with future funding decisions and help you better understand non-dilutive funding.
Non-dilutable shares are shares that won’t get diluted in future rounds of funding. These are shares that allow the owner to maintain equity in the business. It is generally advised to never issue these types of shares to other investors, as this can dilute the equity of the founders and hurt future investing opportunities. Holding onto non-dilutable shares protects founder equity.
Issued stock refers to the number of shares that have been distributed to and held by shareholders. Companies can create new issued shares and issue new stock. Once stock has been issued to existing investors, executives, and others, it can be traded on the stock market. Anyone who owns issued stock has an ownership interest in the business, though owners can ensure that they maintain the majority of issued stock
The price-to-earnings ratio measures the company’s share price in comparison to its earnings per share. Investors use this to determine whether a company is valued properly in the market. The way to measure this ratio is:
(Price to earnings ratio) = Share price / Earnings per share
What Are the Benefits of Non-Dilutive Funding?
The biggest benefit of non-dilutive financing for startups is that it ensures you maintain 100% ownership of your company. You don’t have to worry about giving up equity in your business, which could lower your earnings if you were to sell your company in the future. You also will maintain full control over how you run your business, as you aren’t subject to investors and shareholders.
With non-dilutive growth capital, you don’t necessarily have to depend on a loan to obtain your funding. This is especially helpful for business owners who don’t have a strong credit history. Funding the business without a loan gives you added financial flexibility for obtaining needed funding — and repaying it when necessary.
At the same time, non-dilutive funding options such as short-term business loans can be helpful in the long-term by helping you build business credit, which will make it easier to obtain financing in the future.
Long-term, seeking non-dilutive funding can be the better option for entrepreneurs, even if they can’t always raise cash as quickly as they would with equity funding.
Is Non-Dilutive Funding the Right Choice for My Small Business?
So, how can you be certain if non-dilutive funding is right for your business? There’s no right or wrong answer — it largely comes down to your preferences for how you manage your business and your current financial situation, particularly your working capital needs.
Obtaining non-dilutive capital is of the most worth to entrepreneurs who want to maintain complete control of their company. If you’re concerned about other stakeholders keeping you from running your business like you’d want, then this is definitely the preferred route to take.
Non-dilutive funding is also the right choice if you hope to sell your small business in the future. By only using non-dilutive financing, you don’t have to worry about others blocking your move to sell or keeping a portion of the profits when you do sell.
However, you should also be mindful of your financial situation. For example, crowdfunding may not raise enough money to support your business’s needs. And new businesses that haven’t generated revenue can struggle to qualify for loans. If you need an influx of cash to start or grow your company but can’t obtain enough non-dilutive financing, you’ll likely need to turn to equity funding. Understanding the amount of capital needed for your niche can help you determine which funding option will work best.
Non-Dilutive Funding FAQs
Why do startups seek non-dilutive funding?
Startups seek out non-dilutive funding when they need to improve their working capital or cash flow, but don’t want to give up equity or ownership shares of their business. Non-dilutive funding ensures they maintain full ownership.
Where can I find non-dilutive funding?
There are several potential sources of non-dilutive funding available to business owners, including grants, loans, invoice factoring, crowdfunding, and venture debt. The right option will depend on factors unique to your business, such as how much money you need to raise and what type of repayment plan (if applicable) is manageable for your business.
Non-dilutive shares have the potential to decrease how many outstanding shares a company has. This can increase how much the company earns per share. However, issuing non-dilutable shares to other investors can be dangerously dilutive for the founders.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.