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Different Types of Non-Dilutive Financing​

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Non-dilutive funding can take many forms. Common types include crowdfunding, loans from family, licensing, product royalties, tax credits and other awards. Grant awards, whether from governmental or non-governmental entities, are often the most prized form of funding, since they immediately allow the company to fund day-to-day operations, develop products, perform clinical trials and redesign marketing material. Crowdfunding raising small amounts of money usually via online appeal, from several individuals) and family loans (revenue raised from relatives) are unpredictable and may incur a reputational cost, especially if they don’t work as the company owner expects.

Tax credits are deducted from the taxes your company owes, yet requires the business to spend funds up front. Qualified companies can secure either refundable or nonrefundable credits. The former allows owners to receive a cash refund after paying all the tax they owe while the latter is applied to income tax with a direct cash infusion.

Alternatively, vouchers are a form of government assistance that lets companies secure facilities, goods, services, or professional advice. Since vouchers are non-transferable, they don’t often have a cash value as they are secured under the company’s name. The funding is provided directly to the service provider on behalf of the recipient.

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One popular form includes revenue-based financing (RBF), where investors provide companies with capital in exchange for a percentage of the monthly revenue as a return on the investment. The returns only continue until the initial capital amount plus any accrued multiple is repaid; most RBF investors expect to be repaid within four to five years of the investment, depending on the loan size.

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Revenue Sharing

Within non-dilutive funding comes a method relatively new to the traditional financing space: revenue sharing. Investors provide companies with growth capital in exchange for a percentage of monthly revenue as their return on investment. This collection of monthly revenue stops once the company buys back the investment.

Not only does revenue sharing allow founders to retain ownership and control of their company, but it also provides flexible repayment schedules. Monthly payments are directly proportional to monthly revenue. This is a stark contrast to bank loans, where even if your business is running at a loss, you still have to pay interest at scheduled dates to the lender. With a shared focus on sustainable revenue growth, startup founders can enjoy flexibility while maintaining full ownership and control of their company.

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Venture Debt

Venture debt is a form of debt financing that is only available to venture-backed startups. Small companies that aren’t in a position to give up equity or secure financing from banks turn to venture debt, allowing the company to take on debt rather than give up shares. Importantly, this capital isn’t issued through venture capital firms. Instead, a specialized venture debt lender, such as a bank, hedge fund, private equity firm or business development company, provides financing. Extremely successful companies, such as Uber and AirBnB, have a long history of accruing venture debt. The loans are structured similarly to medium-term business loans in that they are paid off within three to five years. Companies leverage venture debt to increase their own growth without requiring additional rounds of equity financing.

Venture debt is considered a great complement to equity; it’s especially helpful for those that want to extend the runway between funding rounds, finance a specific project, purchase equipment, or limit dilution. However, any company taking on debt should have the means to repay the loan since lenders can force the guarantor into bankruptcy in order to recoup.
 

Annual Recurring Revenue Lending

Annual Recurring Revenue, or ARR, refers to the value of a company’s subscriber base or the yearly value of a single subscription. Software companies, such as Spotify, Adobe’s Creative Cloud or Netflix, rely on the measure in order to evaluate their profits. Alternative lending sources often evaluate SaaS companies based upon their ARR. In combination with the customer renewal rate, the ARR helps the lender determine whether or not they’d like to enter into a long-term relationship with the company. ARR lending is very similar to venture debt, allowing subscription-based services to maximize their returns without losing company ownership. Accelerate your business growth
 

Structured Equity Products

Structured equity products are pre-packaged investment deals that include a mixture of assets linked with interest. The products are derived from securities, a basket of stocks, commodities, debt issuance, foreign currency or an index.

In other words, the investment return is dependent on some underlying asset with pre-determined features, such as capital protection level or maturity date.​