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What Is Non-Dilutive Funding, and How Do You Get It?

In the fast-paced tech world, startups and equity dilution are nearly inseparable.


Cash-strapped founders can use their equity to raise capital, compensate advisors, and attract the talent they need to turn a clever idea into a successful business. Those who leverage their equity wisely can make a profitable exit, fund their next endeavor, or enjoy an early retirement.


What is non-dilutive funding?

Managing equity dilution is a delicate balancing act, though, and founders don’t always get it right. Too much dilution too soon can leave them with less than 5% of their business — or worse, they can lose their company entirely. There are certainly benefits to raising equity at the right times and for the right reasons. For many startups, it’s best to delay equity dilution as long as possible and focus on growing a healthy, sustainable business.


These days, equity capital is as expensive as it is elusive. Pitchbook recently reported that demand for startup capital is more than double the supply coming from VC firms. This market imbalance has produced one of the most investor-friendly environments we’ve seen since 2010.


Pitchbook Index: Demand for venture capital is double the supply

Even in a challenging funding market, startups still need capital to extend runway and maintain momentum, and to invest in scaled growth. Stagnation is simply not an option. Founders who can raise capital without dilution stand to gain the biggest advantage.


What is non-dilutive funding?

Non-dilutive funding is startup capital that does not require founders to give up equity in their company. It can be used to make investments for growth, fund working capital, and extend runway.


Non-dilutive funding offers many benefits, including:


  • Founders preserve existing equity, ownership, and control of their business.

  • Non-dilutive capital costs far less than dilutive equity capital, particularly at earlier stages in the startup lifecycle.

  • Startups can get non-dilutive funding relatively quickly — a debt capital transaction can close in as little as 10 days.

  • Qualifying for debt funding is far more objective than for equity funding; that means there’s a lot more diversity in the founders and startups that raise debt.

  • Founders can focus on growing the business, driving results that not only increase the company’s value but also improve future equity offers.

  • Non-dilutive funding can complement an equity round so founders can maximize growth while minimizing dilution; founders simply take less equity capital alongside debt to raise all the financing they need.


Dilutive vs. non-dilutive funding

There are pros and cons to every funding solution, but founders often grossly underestimate how much the equity they give away for capital will cost them. If you qualify for debt, then the cost of the interest paid in a successful business will be a small fraction of the ownership value you give away in a single funding round — even more so in a startup’s early stages.


 

Dilution Calculator

Try our dilution calculator to see how dilutive and non-dilutive funding costs compare.


Preview of Lighter Capital's startup dilution calculator


 

Examples of non-dilutive funding

Non-dilutive funding includes debt that’s paid back with interest, like a small business loan or line of credit, and grants. Thanks to private lenders who recognized a particular segment of the market wasn’t well served by those traditional funding sources, there are now more non-dilutive options than ever.


Without assets, pre-revenue SaaS startups can’t get bank loans; SaaS entrepreneurs may have a shot if their business is generating revenue and they put up their home or personal savings as collateral. Grants are even less accessible. Sticky revenue and high margins, however, make innovative SaaS businesses quite valuable in the eyes of other investors.


Consider these alternative non-dilutive financing solutions offered by private lenders:


Revenue-based financing

Lighter Capital was the first revenue-based financing lender in the market in 2010. For startups — particularly SaaS businesses that can start generating revenue quickly — the zero-equity revenue-based funding option is a game changer. Post-revenue startups get upfront cash and pay a fixed percentage of their future revenues, so monthly payments ebb and flow with the business.


MCA loans

Sometimes marketed as revenue-based financing, a merchant cash advance, or MCA loan, is similar to the revenue-based payment model but with a major structural difference: Monthly payments for these short-term loans are typically based on daily sales. Funding from merchant cash advances is often used to manage cash-flow shortages or to cover short-term business expenses. Growth investments that take longer to generate revenue gains are not a good use for MCA loans, which can be very expensive from an APR perspective and can strain a startup’s cash flow.


Venture debt

Venture debt financing is commonly offered in conjunction with equity financing for businesses already backed by a venture capitalist. It may help a startup avoid further dilution of the company’s shares. Venture debt usually includes warrant coverage in the deal terms, giving the lender some upside if the business does well. Because warrants give a lender the right to purchase shares of the business, venture debt is not truly non-dilutive.


How much non-dilutive capital can a startup get?

Non-dilutive funding amounts, though typically smaller than dilutive venture capital funding deals, can reach tens of millions of dollars. Venture debt amounts are usually 20% to 35% of a recent equity round, according to Silicon Valley Bank, and tend to offer startups more capital than other types of loans. SBA 7(a) loans, for example, max out at $5 million.


In general, funding amounts are aligned with a startup’s financial profile and other terms of the funding, such as term length and repayment structure. When a loan is paid back, some lenders will give the business the option to secure additional tranches or rounds to keep investing growth.


SaaS startups with at least $200,000 ARR from recurring revenue can get up to $4 million in revenue-based financing from Lighter Capital with zero equity dilution. We right-size funding to where the business is today and provide follow-on financing that scales with growth. Startups can get up to 4X their MRR in their first tranche. Companies with over $350,000 MRR can get up to 6X if other financial metrics, like gross margin, meet certain requirements.


 

Got Revenue? Get Capital to Grow. Keep Your Equity.

Lighter Capital has provided financing to 500+ tech startups, totaling over $300M through over 1000 rounds of funding. Apply in minutes to get up to $4 million in non-dilutive growth capital — no pitch decks, presentations, or business plans required.



 

How to get non-dilutive funding for your SaaS startup

Most debt providers have a quick and simple pre-qualifying application for funding. After applying, it’s a good idea to prepare to discuss your business in detail with the lender. You should have some ideas about what you want to use the capital for, which will ensure you have a productive conversation that determines next steps.


These are 7 common use cases for non-dilutive funding:


  • Marketing and sales investments

  • Product development investments

  • New market expansion

  • Building a customer support function

  • Making key hires and adding new teams

  • Refinancing old debt to smooth out cash flow

  • Buying out early investors


Qualifying for funding

In a world riddled with tall tales of heaping pots of gold at the end of the venture capital rainbow, debt has garnered a dubious tinge when it should really be seen as a badge of honor. A SaaS startup that qualifies for non-dilutive debt funding is healthy and ahead of the curve.


Though qualification requirements vary from lender to lender, founders can unlock access to affordable, non-dilutive debt capital by focusing on business and financial metrics that show signs of sustainable growth.


Here are 7 things non-dilutive debt providers look at when qualifying applicants:


1. Recurring revenue

Alternative non-dilutive funding solutions cater to tech startups with strong business models that have not been well served by traditional banks — in lieu of assets and profitability, you’ll need sticky, recurring revenue.


2. Revenue growth

Debt providers generally want to see that your revenue is growing. That’s it. You could be growing 10% or 100% annually. Strong growth can open the doors to more favorable loan terms, particularly if it can reduce your burn rate and provide a path to profitability. Unlike venture capital, there are no revenue growth rate requirements.


3. Churn

Both customer churn and revenue churn are key indicators of a startup’s success and viability. Over time, they should decrease as a company finds its product-market fit. These metrics can be misleading without additional context; nevertheless, they’re an important piece of your startup’s financial story.


4. Net revenue retention

Net revenue retention (NRR) is the sum of a company’s retained, contracted, and expanded revenue. It is expressed as a percentage, and anything over 100% is considered positive. It shows sticky customers. If, however, the business has high growth along with high gross revenue churn, it’s bringing in revenue from new customers faster than it’s losing revenue from churned customers. Though that’s good news in the short term, it’s not sustainable.


Net revenue retention formula

5. Customer concentration

High customer concentration is risky business. If most of your revenue comes from 3 or 4 customers or if your biggest customer accounts for half of your business, then you might not qualify for non-dilutive debt. If you can address your customer concentration with a lender, point out things like autorenewals, longer contract terms, and increasing contract value from your biggest customer to show that your customer base is secure.

6. Cash burn and runway

You might be optimistic about decreasing your startup’s cash burn in the next few months, but a lender cares only about your last 3 to 6 months of burn and how much runway you have today. Debt providers have different requirements for runway, and this is one metric that does allow for some wiggle room when considered alongside other factors. At Lighter Capital, for example, we like to see a startup reach at least 12 months of runway with our funding, though 9 months may be suitable for a business with manageable cash burn if the business is growing fast enough.


7. Outstanding debt

Existing debt can be problematic when you’re applying for more debt, but lenders are looking for very specific things — you shouldn’t assume that having debt means you won’t qualify for the capital you need. A good rule of thumb is to keep your total cash-paying debt — debt you’re repaying on a set schedule — at less than half your startup’s ARR.


Comparing non-dilutive capital costs

You should always consider the cost of capital when making funding decisions for your business. That said, it can be difficult to compare and contrast the costs of differently structured loans, and it’s easy to overlook how repayments will affect cash flow.


Lenders play plenty of tricks with interest rates — some are upfront, and others are not. It’s a good idea to ask any potential debt provider what the effective interest rate is on the loan and how their math works out.


We have some helpful resources in our Founders’ Hub that can guide you through evaluating options and offers:



Important: You don’t have to accept debt if you qualify for it, so it never hurts to explore options for your business. The process alone can give you valuable information about your company and its financial health.


Cost vs. Value

Founders need to think about their short- and long-term goals for funding, too. Do you need cash to survive and keep the business going? Is investing in growth initiatives and scaling up a top priority? Do you want to increase your valuation before going into an equity raise? The interest component on financing to achieve any of these outcomes is minuscule compared with the potential gains as an entrepreneur.


Early-stage startups and bootstrappers can see the greatest impact from non-dilutive funding when it’s used at an inflection point. For example:


  • You closed your largest contact to date and need to build out the team to service the account.

  • You unlocked a lucrative marketing channel and you want to double down on it.

  • You have a robust pipeline, and you need to hire a sales team to engage prospects and close deals.


A small growth capital injection for investment in an immediate opportunity can help improve metrics and get the business to its next milestone faster, with the potential to garner higher valuations and save millions in equity down the line.


Today, interest rates in this space can exceed 20%, though this depends greatly on the loan provider, the loan terms, and the startup’s financial profile. That may seem high, and the cost of borrowing is important, of course, but non-dilutive funding should also be assessed on its value.


Founders who get financing to fuel 5X growth without having to worry about cash flow — and without diluting their equity — don’t bat an eye when they look back at an interest rate. In fact, Lighter Capital’s customers frequently come back for additional rounds of funding.


Interest rates on Lighter Capital’s funding reflects the most founder-friendly loan terms you'll find in the market, and our customers tend to find them quite reasonable for what they get overall. Our revenue-based financing doesn't have:


  • Personal guarantees,

  • Restrictive covenants,

  • Warrants; or

  • Equity requirements.


That means you, the borrower, retain complete control over your business, and you have the utmost flexibility to use the capital as you see fit. As a lender, we are assuming more risk if your business defaults or fails, and we won’t see any upside if your business booms.


Listen to Sunil Gowda share his experience growing Garmentory into a profitable e-commerce business with non-dilutive funding from Lighter Capital:



 

Preview of Lighter Capital's Guide to Financing Your Startup Using Non-Dilutive Debt

Learn more about non-dilutive debt financing for startups


Financing Your Startup Using Debt is one of our most popular founder resources! Get the guide that can help you make smarter fundraising choices for your startup. See how to compare and contrast different types of startup loans, then work through specific financing examples to understand the real costs with this comprehensive guide.



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