Non-dilutive funding lets your business raise capital without giving up ownership or equity. Common forms include grants, business loans, and revenue-based financing. These funds can help cover product development, equipment purchases, hiring, and other costs startups face as they grow.

Below, we’ll discuss the common types of non-dilutive funding, their suitability for different startups, how it compares with equity funding, and when it makes sense.

Key takeaways

• Non-dilutive funding lets startups raise capital without sacrificing ownership. It differs from equity financing because it doesn’t require issuing shares to investors.

• Several types of non-dilutive funding are available to founders, including small business loans, grants, revenue-based financing, venture debt, and government and industry-backed programs.

• The best approach depends on the business. Early-stage startups can benefit from government or private grants, while ventures with steady revenue could qualify for loans or revenue-based financing. Grants don’t require repayment, but loans do.

What is non-dilutive funding?

Non-dilutive funding is capital that doesn’t require giving up equity or ownership in a company. By contrast, equity-based financing requires businesses to give up an ownership stake in exchange for funds. Issuing new shares dilutes existing shareholders’ stakes because their shares now represent a smaller portion of the company.

For example, a growing business could take out a loan to purchase equipment needed to meet rising customer demand. A startup founder could also get a grant to develop new technology. In either case, the recipient meets its capital needs without seeking equity investors or giving up ownership.

What are the common types of non-dilutive funding?

Non-dilutive funding comes in many different forms, each with its own eligibility rules and conditions:

• Small business loans: Businesses with strong credit, collateral, and consistent revenue can qualify for a traditional loan or a Small Business Administration (SBA) loan, if they’re in the US. Repayment terms and rates vary by loan type and lender.

• Government and private grants: A grant is money given by a person, organization, or government for a specific purpose that doesn’t require repayment. Grants can be highly competitive; the application process could be long, and some restrict how recipients can use the funds.

• Revenue-based financing: With this arrangement, a provider advances money to a business, which must repay a set percentage of future revenue up to an agreed maximum total. Lenders typically require businesses to show steady revenue and earn at least a minimum amount each month.

• Venture debt: This is a loan from a specialized bank or private lender to a startup that already has venture capital investors. The loan helps the startup stretch its funding until the next investment round. Venture debt usually comes with warrants, which give the lender the right to buy a small amount of company stock later. In those cases, the funding isn’t entirely non-dilutive.

• Research and industry programs: Government and industry-backed initiatives can fund research and improvement in a particular field without taking equity. For instance, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs provide federal funding for science and technology advancement.

Which types of non-dilutive funding suit which startups?

The types of non-dilutive funding that best serve your business will depend on your business model, growth stage, and how soon it needs the money:

• A straightforward option is a small business loan, which can provide capital for businesses that demonstrate steady income and offer collateral.

• Grants work well for research and mission-based startups with long development timelines since they can plan around slow reward processes.

• Revenue-based financing could suit startups with predictable recurring revenue (e.g., subscription software providers).

• A startup that’s already received a venture round could turn to venture debt to cover expenses until the next round.

• Research and industry programs are a good fit for companies developing new technology in specific fields (e.g., biotech, clean energy) where a government agency has strong interest.

Remember that non-dilutive funding is just one part of your overall fundraising and business plan. Consider using a mix of funding sources to avoid being dependent on any one funder.

Set up your business entity early to keep more financing avenues open. For instance, grant providers generally expect applicants to meet registration and licensing requirements.

How does non-dilutive funding compare with equity funding?

Non-dilutive funding allows businesses to raise capital while preserving existing ownership stakes. Equity financing provides funds that don’t require repayment, but you give up a stake in the company. Both options have advantages and drawbacks to consider before you start fundraising.

Before choosing a funding approach, determine how much capital your business needs, its intended purpose, and when you’ll need it. Any source you consider must let your business use the funds as planned. Then you can compare costs, eligibility requirements, and timelines to find the best fit.

If keeping ownership is a priority, non-dilutive funding could make sense. But if repayment costs or funding restrictions are a barrier, then equity financing can be a better choice.

When does non-dilutive funding make sense?

Non-dilutive funding can make sense when a business needs capital for a specific project or wants to grow without giving up ownership. It can also help startups cover expenses between investment rounds. Here are a few scenarios where this approach could be beneficial:

• Funding a specific project: An early-stage startup can draw on a research grant to develop new technology or build a prototype without seeking investors and giving up ownership shares.

• Supporting business growth: An established enterprise could take out a loan to purchase equipment or scale operations. A business loan can be a straightforward funding option if the borrower can realistically expect to repay it. The cost is interest and fees, not giving up ownership shares.

• Staying afloat between funding rounds: Venture debt can provide a venture-backed startup with the cash it needs to cover expenses until its next round of funding. But if the lender requires warrants, they could slightly dilute existing owners’ shares.

Early-stage companies with little or no revenue could be limited to grants and competitions. Once a business has steady revenue or a closed funding round, it can access loans, revenue-based financing, and venture debt.

Where can founders research non-dilutive funding options?

Here are some resources founders can consult to explore non-dilutive funding options:

• Government agency databases: Grants.gov and the SBA provide lists of federal grants, and SBIR has information about SBIR and STTR programs. Consider contacting your state’s economic development office to learn about state-level opportunities.

• Online databases and industry associations: Databases such as Candid and GrantWatch list the grants available to businesses and nonprofits. Industry platforms also display grant opportunities in their sectors.

• Financing platforms and apps: You can search online for platforms that focus on finding capital suited to your growth stage. OpenGrants allows you to search for funding sources at the state and local levels. The Skip app lists substantial grants and funding opportunities.

• Accelerator assistance: Many accelerators match grant and funding opportunities with their members and can help them develop strategies for securing capital.

• University resource lists: Universities often provide entrepreneurial resources such as directories of lenders, grants, and competitions available to businesses.

Eligibility criteria and application timelines vary by option. Start your research well before your business needs the money, since non-dilutive funding can take longer to secure than equity funding.

How Stripe Atlas can help

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