Non-dilutive funding gives B2B SaaS founders a way to raise money without giving up equity or control of their company. Unlike traditional venture capital—which often means handing over a piece of your business—non-dilutive options like revenue-based financing, loans, grants, and venture debt let you keep ownership while still getting the cash you need to grow. This kind of funding can be a big help in expanding your business, building new features, and strengthening your financial position. Just keep in mind that these options usually come with repayment terms and certain eligibility requirements.
This article covers the most important types of non-dilutive financing and their considerations for SaaS founders who want to grow their businesses without giving up ownership.
Non-Dilutive Funding: What Is It?
Non-dilutive funding is capital that does not necessitate the surrender of equity in your company to obtain financing. It contrasts with venture capital (VC) investment, which involves the sale of a portion of equity in exchange for working capital.
Non-dilutive funding enables you to obtain funds based on other business factors. For startup founders and small-to-medium-sized business proprietors who are seeking financing without relinquishing equity or ownership in their company, this type of funding is a valuable alternative.
VC funding is frequently perceived by many entrepreneurs as the sole funding option for software-as-a-service (SaaS) startups.
Although dilutive funding can offer mutual benefits and is a crucial option for larger expansions, there are a growing number of funding alternatives that do not require giving up full control. This autonomy is especially advantageous for startups that are in various stages of development.
Consider a SaaS startup that launches its successful MVP, resulting in steady MRR while avoiding a seed round by choosing revenue-based financing to obtain $200,000. The founders selected revenue-based financing over seed equity funding to acquire $200,000 because they wanted to keep full ownership control. Through this funding method, they enhance their marketing strategies while recruiting necessary developers and developing core product capabilities, even though it allows them to maintain full company ownership. Non-dilutive capital applied strategically in this manner leads to increased growth speed without diminishing ownership control.
When Should You Choose Non-Dilutive Funding Over Equity Financing?
This part explains when to pick non-dilutive options over equity so you can keep control of your company.
Non-Dilutive Funding to Scale Your Early-Stage Startup
During startup expansion phases, non-dilutive funding provides exceptional advantages that benefit organizations, whether their main concern is increasing company value or reducing financial risk.
Low valuations are frequently a challenge for early-stage ventures, particularly those that have not yet demonstrated their business model or generated substantial revenue. These firms are able to secure financial resources without compromising their valuation or negotiating equity terms through non-dilutive funding.
Equity Financing to Fund Your Pre-Revenue Startup
The requirement for companies to prove they can repay borrowed funds remains a common element when accessing non-dilutive funding resources, though their repayment obligations often link to sustainable revenue streams or major revenue streams. A company with no revenue should consider equity funding or venture capital as funding solutions because these methods are the primary forms of dilutive funding that involve giving up ownership but do not require repayment.
Key Considerations for Non-Dilutive Funding
Businesses should evaluate non-dilutive funding carefully as a decision for their current development stage. The list below contains important factors to consider.
Advantages
- There is no need to sell a stake in your business to get funding you can use.
- Personal guarantees or creditworthiness are not required for some types of non-dilutive funding, like grants and certain revenue-based financing, although other types may require them.
- You can repay based on anticipated income by leveraging predictable revenue using revenue-based or recurring revenue financing.
- Repayment terms can be more flexible than traditional loans, especially with revenue-based products, though terms vary by provider and product.
- Non-dilutive funding incurs direct financial costs, which are generally predictable and, at times, even lower than the long-term opportunity cost of equity dilution.
- Non-dilutive funding can act as a bridge for companies unable to raise equity capital immediately, helping them to reach milestones needed for a subsequent round.
Drawbacks
- Initially, you may be able to obtain a smaller amount of funding.
- Lenders may make it more difficult to qualify for non-dilutive funding to reduce their risks.
- If the initial amount is inadequate, it may be necessary to pursue additional funding sources.
- The financing is typically structured as a loan, necessitating repayment within the agreed-upon terms.
- Getting a non-dilutive financial resource as a startup is usually more complicated than obtaining equity financing because it often requires revenue and specific eligibility criteria.
- Some non-dilutive financiers may require you to meet stringent conditions, like personal liability, despite the fact that many adhere to industry norms.
- Some lenders may add warrants or covenants, allowing them to access your equity even if you don’t.
Types of Non-Dilutive Funding
There are numerous non-dilutive funding alternatives available; however, not all options will be suitable for every business. In the following section, we will examine the most prevalent varieties and the ways in which they can cover essential operational costs, product development, and marketing expenses and support scalable growth.
Venture debt
Venture debt is a non-dilutive funding option that is exclusively available to venture-backed enterprises. This option enables small businesses to acquire debt instead of relinquishing their company shares. Startups can access the capital necessary for growth while maintaining more ownership, as they are not required to give up control to a venture firm.
Venture debt is frequently utilized to supplement equity financing, thereby extending the startup’s runway between funding phases, and it is often provided in collaboration with banks, hedge funds, or private equity firms. The loans are typically designed with a repayment period of 3–5 years, which allows for flexibility to invest in growth without the imminent need to raise additional equity funding.
Loans
Banks, credit unions, online lenders, and non-bank financial institutions may provide loans. Funding is often exclusively available to small enterprises from the government or banking institutions.
The benefits of short-term loans include immediate funding, although they require fast repayments, charge higher interest rates, and offer lower funds compared to long-term loans. Online lenders have made short-term loans more accessible to business founders, especially those operating in the SaaS industry.
Due to tight restrictions, getting long-term financing from banks is difficult. Still, online loan providers usually approve the application in a shorter time with less requirements and, of course, at higher rates, too.
Typically, organizations that are over two years old and have a robust revenue stream are eligible for long-term loans.
Lines of credit
A business line of credit (LOC) is a short-term business loan that also offers flexibility. You may borrow up to your limit and repay the amount over a period ranging from a few months to a couple of years.
The major benefit of this funding option is that you only pay interest on what you use, and your credit is renewed as you pay back the borrowed money. However, this requires a high credit score and a long credit history to be possible.
Grants
Small business grants are rare and highly desired because they don’t need to be repaid. However, grants have strict rules on how the funds can be used and require detailed reporting.
A grant designed to encourage innovation, research, and development (R&D) can offer startups that concentrate on product or technology enhancements the opportunity to do so without imminent commercial constraints.
A startup can improve its credibility through non-dilutive funding from reputable industry grants because external experts or entities have validated its business concept or technology.
This necessitates a thorough comprehension of the documentation and the availability of the necessary resources to manage it, particularly if the grants are obtained from government sources. Consequently, grants are an optimal funding source only when they are specifically designed for approved use cases.
Credit cards
With a business credit card, you get credit you can keep using. It can help grow your credit score if you use it right, and you might be able to raise your limit over time. But high interest kicks in if you don’t pay it all back each month.
Merchant cash advances (MCA)
A merchant cash advance (MCA) enables you to borrow against prospective credit card revenue. It has the highest approval rate among small business funding options, but it’s also one of the riskiest and most burdensome.
To qualify for MCAs, a minimum monthly sales threshold is frequently required, and there is a significant amount of documentation involved. They also have limited payment terms, with penalties for non-compliance and high interest rates, sometimes as low as three months. When all other alternatives have been exhausted, MCAs should be considered.
Recurring Revenue Lending as a Growth Financing Option
Growth financing, notably through recurring revenue lending, is a non-dilutive funding option that is well-suited for companies with predictable income streams, such as SaaS businesses with subscription-based revenue. This form of financing is predicated on a comprehensive examination of the organization’s recurring revenue, which enables it to obtain capital without giving up equity.
To sum up, B2B SaaS founders can use non-dilutive funding to grow their business without giving up any ownership. These options give them the flexibility and financial support to follow their vision. The right option depends on the company’s stage of growth, how it makes money, and its long-term goals.
Grow Your SaaS Business Without Dilution
In the fast-growing SaaS market, understanding and using non-dilutive funding options can be a game-changer. Venture debt is one option that provides funding without giving up shares, which is perfect for startup founders. It also helps B2B SaaS companies grow while keeping ownership and control intact.
Are you interested in finding out how venture debt can work for your SaaS company? Start with Cheqly today and learn how you can grow your business without giving up ownership.