Being a startup CEO and without non-dilutive capital creates many hurdles and challenges you need to overcome as you set up a business. However, every business person knows that one great difficulty they are bound to face is getting funds. Unless you come from a prosperous family, have extensive savings or a pipeline of contracts to assist you during the first months and years, running your business can be hard. What’s more, you are required to hire the right talent, develop a prototype and find customers.
So what can you do to get the funding you need to run your business? On a regular basis, you may be asked about non-dilutive capital options for medium-sized and small companies. Is it possible to finance your startup without giving up equity?
Selling a part of your business’s equity, or a share of the company is one option you can consider. However, you will be giving up ownership. Luckily through the non-dilutive capital, you can easily access the funding you require without giving up the shares of your company.
Other than raising money from friends and family, you can consider different non-dilutive capital options such as tax credit programs, vouchers, grants as well as business plans or pitching competitions. This way you will be able to get your company funds and still keep the ownership. Before we can expound on these programs, let’s define non-dilutive capital.
What is Non-Dilutive Capital?
Also known as non-dilutive financing or non-intrusive capital, non-dilutive capital is the capital received by entrepreneurs to help in establishing or growing the company, and it does not require the business owner to give up a share of the company. Although investment companies and investment angels will ask for some equity if you need funds, non-dilutive capital like funds raised through mezzanine loans or government grants doesn’t have these requirements. Such capital is not always given ‘free’ of charge; and just the same way traditional loans attract interest, some grants come with specific organizational requirements and restrictions.
Nevertheless, it’s difficult to overlook the importance of such funds. Sometimes, failing to know how, and when to get non-dilutive capital could mean the loss of money or profits for the entrepreneur. To ensure that this doesn’t happen to you, here are some different non-intrusive capital sources.
Grants as Non-Dilutive Capital
As defined by Investopedia, grants are financial awards entrepreneurs’ get from provincial, federal or local governments as long as they are eligible grantees. The granting organization does not expect grand recipients to repay the funds received. Often, the application process for receiving grants can be very lengthy, but once you get it, you will be able to support certain projects or grow your startup. The larger the grant amount or granting organizations you may be ask for periodic reports regarding the outcome of the usage of funds as well as how an entrepreneur allocated the money to their business.
Because you are not obligated to pay the grant, the chances of getting the funds are harder, and the application process may take longer because the organization wants to make sure that the funds will be utilized appropriately to make a difference. Be aware of this granting criterion and if you can consider reaching out to the granting organization before you can begin the application process. You can find many grants in your local area by simply searching for local grants in google.
Vouchers as Non-Dilutive Financing
A voucher is a kind of a government assistance that businesses can use to access goods, services, facilities, expertise or advice offered by service providers or suppliers. Necessarily, you can use a voucher to show that transactions have taken place and that there is an owed amount. Vouchers typically don’t have a cash value and are non-transferable because they are given under a company’s name. But, the funding gets applied to the service provider or supplier directly on behalf of the recipient. Some voucher programs provide unsecured repayable loans that are interest-free where a part or the entire loan is reimbursable as per the terms and conditions.
Tax Credits as Non-Dilutive Capital
Another means getting non-dilutive capital is through tax credits. Tax credits are the funds deducted from the tax you owe. To be eligible for a tax credit program, a company is required to spend the funds up front. In case the company qualified for tax credit programs, there will be a nonrefundable or refundable tax applied to the amount of income tax owed.
Through refundable tax credits, you will be able to get a cash refund assuming that you have paid all the tax you owe. Nonrefundable tax credits are applied to the income tax you owe, but you will not get the additional amount in cash form.
Maintaining Control of Your Company and Your Vision
The principle benefit of acquiring non-dilutive capital is that it helps the company owner or shareholders to retain the control of their enterprise. You are not required to lose sight of the company’s objectives or change your vision to get the financing you need. In most cases, venture capitalists may require more than your company’s share; they might want to control the business or have a say in running the day to day activities in the company. This is not a problem you will face when you get non-dilutive capital.
Retaining the Value of the Company
Holding a significant share of your startup is financially beneficial to you, meaning that you can raise more capital at a later stage when your company grows. In most cases, venture capitalists tend to lose interest in investing in a company when they discover that a large part of the business is owned other external parties. This devalues the company since you have minimal shares to offer future investors. When you retain control or the equity of your business, you will be able to raise more money in case you exhaust your mezzanine and grants funding options.
You want to be able to expand your startup and make more money without losing control. This is the main reason most company owners go into business in the first place. Through non-dilutive capital options, you will be able to get the funds you need to grow your business without relinquishing ownership.
For early stage investors you have a look at our 8 sources we’ve provided.
The number of government grants available to you will surprise you and it’s an avenue you must consider. Believe it or not, governments actually want you to succeed and they know that money and starting on the right path are important parts of achieving success. Thus, it should be in your best interest to look into the various grants available for your business.
Have you ever applied for a grant? Has non-dilutive capital helped your business? Let me know your thoughts below.