Non-dilutive financing is an attractive funding option for startup founders and small to medium-sized business owners seeking financing that does not require them to give away equity or ownership in their company. While for many businesses non-dilutive funding is crucial for getting their startup off the ground, it is also incredibly useful at different stages of growth.
Non-dilutive funding can take many forms that include crowdfunding, grants, loans from family and friends, tax credits, and licensing.
Below is a guide to the basics of non-dilutive financing that can set you up for success when applying for funding.
Loans, available as formal and informal transactions, are the simplest way of injecting non-dilutive capital into your business. While informal loans (meaning loans from family and friends) may be forgivable, formal loans often require credit checks, collateral, and guarantors as well as repayment at different (often higher) interest rates. This does make informal loans seem more attractive but they do present their own unique set of challenges in expectations and relationship management.
Crowdfunding involves appealing to a large number of individuals, mostly through online channels, and asking them to fund the venture by pitching in small amounts of money. Successful crowdfunding is built on trust and brand credibility but also brings with it the risk of unpredictability. A successful crowdfunding campaign requires resources in content creation which encourages individuals to contribute, usually by pulling on heartstrings and showing the emotional aspect of the business. Some founders also entice crowdfunding by offering limited runs of early versions of their products, which also requires an investment of additional capital. Crowdfunding websites also do take a percentage of commission from your total raised funds.
Grants are the most sought after form of non-dilutive funding because, unlike loans, they do not have to be paid back. They can come from both governmental and non-governmental entities. To secure a grant for your business, you are required to go through an application process that includes providing detailed reports of your business objectives and may also require periodic updates on the status of your targets. Grants provide the funding that allows your business to kick start its services and conduct its day-to-day operations. However, it can take some time for the capital to actually arrive so that founders can take advantage of them in a timely manner.
Royalty financing can be seen as a middle ground between traditional loans and equity financing. In royalty financing, a business gets money from an investor or group of investors and the investors get their money back through royalties from a percentage of the company’s revenue. This option of non-dilutive financing is used by companies with large revenue streams that are confident in their abilities to garner enough revenue to reimburse investors through royalties while meeting their regular revenue goals.
Tax credits are deducted from the income tax your company owes. However, they require your business to spend money upfront in order to be eligible. Your business can qualify to receive refundable or non-refundable tax credits. This is another type of financing which may take some time before founders receive the capital.
The Canadian government’s SR&ED tax credit program rewards businesses who invest in Scientific Research and Experimental Development (R&D) ventures. The SR&ED program pays off a portion of the amount invested by companies into eligible R&D initiatives.
If you are looking for non-dilutive funding, you may be eligible for one of our funding programs. Find out how OKR Financial works with entrepreneurs here.