Non-Dilutive Capital 101

Are you the owner of a small or medium-sized business looking for the best possible way to fund the next major growth initiative for your company? Raising capital to fuel the next step for your organizational growth often comes with the drawback of losing control over your business’ future due to lost equity in the business.

Traditional bank loans like small business loans are challenging to come by. Strict regulatory environments also make it difficult to secure bad credit funding if your business is not in the best shape. Financial institutions prefer lending to larger enterprises, especially those with substantial cash flow, credit, collateral, or a good debt-to-income ratio.

Fortunately, small- and medium-sized businesses (SMBs) can work with alternative lenders to secure flexible funding programs, like non-dilutive capital - allowing their businesses to grow. The result is SMBs gaining the ability to secure more substantial lines of capital.

Let’s take a look at what non-dilutive capital is and why you should consider it for your business.

What Is Non-Dilutive Capital?

Non-dilutive capital, in essence, refers to any funding a business owner can secure without giving up equity or ownership. Today, many business owners require non-dilutive funding as a prerequisite to taking their SMBs to the next level.

Companies want to ensure that they can keep building their equity during their nascent stages, making non-dilutive capital a critical tool.

Securing non-dilutive funding does not mean it comes without a catch. Yes, you will not lose controlling interest in your business's future. However, some types of non-dilutive funding can incur additional oversight, restrictions, or other costs for your business.

Dilutive funding, in comparison, requires securing capital in exchange for a portion of your ownership. It requires sacrificing some of your control over the company’s future (and a portion of future profits as it grows).

What Are The Types Of Non-Dilutive Capital?

Non-dilutive capital comes in various forms. Common types comprise product royalties, licensing, loans from family members, crowdfunding, grant awards, or most recently, the Paycheck Protection Program introduced by the federal government to provide relief from the pandemic’s financial pressure.

Merchant cash advance (MCA) is another form of non-dilutive funding that allows small businesses to secure funding quickly. Building business credit takes a considerable amount of time. Companies that do not qualify for conventional loans but require quick cash injection can resort to an MCA instead.

When securing an MCA, the cash advance provider allocates you the payment upfront in exchange for a portion of your future sales. The payment structure of this non-dilutive funding method is different from traditional loans. Instead of making fixed monthly payments, you repay the MCA provider with a portion of your daily credit card sales until you repay the entire amount.

There are several types of consolidations for businesses that take out an MCA, the most popular one being reverse consolidation. A reverse consolidation implies that the MCA provider will front the cash advance in exchange for taking on weekly or daily payments through the MCA. Doing so essentially grants you an extension on your repayment term.

The MCA provider typically works with your credit card service provider to collect information regarding your sales volume and receive payment from your company’s credit card terminal. Fortunately, there is no emphasis on your credit history, you do not need to set collateral to secure the funding, and you get the opportunity to build business credit through it.

Should You Consider Securing Non-Dilutive Capital?

Raising funds to take your business to the next level is a dilemma. Securing venture capitalist funding or traditional loans from banks is challenging and comes at the cost of partially losing business ownership. Non-dilutive capital lets you have the final say in company decisions. Additionally, programs like MCAs offer greater accessibility to funding with more flexibility.

Non-dilutive funding is undoubtedly an ideal way to secure funds for your organizational growth. With various types of funding options available, you can choose the ideal option based on your company’s requirements, preferences surrounding equity, and your organizational goals.

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