Non-dilutive financing: six alternative funding options for start-ups

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August 13, 2023

Non-dilutive financing: six alternative funding options for start-ups

Capital—it’s the perpetual challenge that start-ups just can’t seem to shake off. There’s never enough, and getting it can mean diluting your equity. So what do you do if you need capital to grow your start-up, but don’t want the heavy strings that come attached to venture capital?

Non-dilutive funding.

From grants to loans and alternative funding sources, we’re breaking down the eligibility criteria, pros, cons, and how to access each type of financing.

Six non-dilutive funding options for start-ups

Grants

A grant is essentially "free money" that you don't have to repay, making it a very attractive option for start-ups — however, the competition can be extremely fierce. In Australia, grants are typically awarded by government agencies, non-profit organisations, or private foundations to support specific projects or initiatives. Eligibility largely depends on the grant provider's objectives and how your business aligns with their goals. To build your case you’ll need a strong business plan, financial projections, and details about your team and mission.

Government grants: Funded by the government, these grants are aimed at fostering innovation, supporting research and development endeavours, and promoting diversity by assisting underrepresented founders. Browse through the Australian government’s available grants or use the finder tool to filter grants your start-up is eligible for.
Foundation grants: Offered by philanthropic organisations and focused on causes like social ventures, certain industries, or environmental sustainability. For start-ups seeking foundation grants, proactive research is essential. Keep an eye on philanthropic organisations that share your values and objectives, attend relevant events, and engage with the philanthropic community to identify potential grant opportunities.
Corporate grants: Large corporations often support innovation in their industry through corporate grants. These grants typically target start-ups with promising potential to revolutionise the sector, disrupt conventional practices, and offer innovative solutions to existing challenges. Explore the websites of prominent corporations in your industry to find out about their grant programs and CSR initiatives.

Loans

The simplicity and security of a loan makes it a popular method for start-ups to acquire capital, although it comes with the obligation of repayment along with some sort of premium like fees and interest charges. Unlike equity financing, where ownership shares are sold to investors, loans involve borrowing a specific amount of money from financial institutions or lenders.

To secure a loan, start-ups need to demonstrate their creditworthiness and repayment capacity. An application (with lenders other than Kashcade) may typically involve presenting a well-structured business plan that outlines growth projections, financial statements, and a comprehensive strategy for repaying the loan.

Traditional bank loans: Offered by major banks, these loans generally require collateral and credit checks. They are usually tailored for more established businesses with a solid financial track record of profitability.
Alternative lenders: Online lenders cater specifically to start-ups with less stringent requirements. These lenders often provide more flexible terms and expedited processes such as collecting information through APIs instead of documents.

Crowdfunding

Crowdfunding platforms allow start-ups to raise funds from the public as well as private backers in exchange for rewards or equity. Eligibility is mainly based on having an engaged audience, compelling perks and rewards, and a viable business proposition. You'll need a funding pitch, demo video, and list of reward tiers.

Reward-based crowdfunding: involves raising funds by offering non-monetary rewards. Contributors pledge money in exchange for perks like early access, exclusive products, personalised items, and more. Unlike equity crowdfunding, backers don't receive ownership or interest repayment; instead, they get tangible or intangible incentives.
Equity-based crowdfunding: (also known as investment crowdfunding), involves people investing money in a company in exchange for ownership shares. Backers become shareholders and potentially earn returns based on the company's success. Online platforms enable broader investor access, but regulations ensure transparency and protection.
Debt-based crowdfunding: (also known as peer-to-peer lending), involves individuals lending money to borrowers in exchange for repayment with interest. In this model, the backer provides the loan to the borrower rather than becoming shareholders or receiving non-monetary rewards. Regulations and platforms ensure transparency and security.

Invoice financing

By using unpaid invoices as collateral, invoice financing gives growing companies access to alternative capital. In exchange for an upfront cash payment, companies can sell their outstanding invoices at a lower value to finance providers. When customers pay their invoice, the financing company collects the full amount, keeping the difference as profit.

Eligibility requirements typically include having invoices from creditworthy customers, a stable revenue, and a track record of profitability. Start-ups with higher monthly recurring revenue (MRR) tend to have a larger pool of unpaid invoices, and qualify for more funding.

To apply, companies must provide financial statements, a business plan, and a list of unpaid invoices.
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Revenue-based financing

Revenue-based financing operates on a distinct premise—funding in exchange for a percentage of future revenue. Unlike conventional loans, which require fixed repayments, regardless of performance, revenue-based financing adjusts repayment based on the startup's actual revenue. Both parties benefit from this flexible approach, as repayments are proportionate to the startup's financial condition.

Lenders typically assess factors such as historical revenue trends, growth projections, and the viability of the business model. Start-ups seeking revenue-based financing need to exhibit strong revenue-generating potential.

Strategic partnerships

Strategic partnerships involve collaborating with complementary companies to achieve mutual business goals. Partners may provide capital, customers, technology or resources in exchange for access to your start-up's offerings, talent or intellectual property.

The key to securing a strategic partnership is the ability to demonstrate a compelling value proposition that benefits both parties. Revenue sharing agreements and licensing deals are common without requiring equity.

Start-ups can apply directly to potential partners or through partner matchmaking programs.

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Optimising your funding mix

Whether you opt for one, or a mix of alternative funding sources, non-dilutive finance gives you the option of leveraging external resources while retaining control over your business.

Make the most of these opportunities by optimising your funding mix and leverage multiple funding sources based on the stage, growth, and needs of your business:

Focus grants on research and development
Target loans/revenue-based financing for scaling
Use crowdfunding to validate concepts
Explore additional avenues such as angel investments, government incentive programs, and accelerators to diversify your funding base and secure strategic support.

Remember to carefully evaluate the terms, consider financial projections, and assess your company's specific needs and growth goals. Several online tools like funding calculators are available to help guide you through alternative finance options. By considering various factors such as revenue, expenses, and growth projections, these tools can help provide insights into the optimal funding option for your business—better equipping you to fuel your start-up's growth without sacrificing equity or control.

Finance type	How to access	Highlights	Drawbacks
Grants	Apply through government agencies, non-profits or foundations	No repayment required Provides financial support for specific projects or initiatives Can be a significant source of capital for start-ups	Highly competitive and limited availability Strict eligibility criteria and specific project requirements Extensive application process and reporting obligations
Loans	Apply for traditional bank loans with collateral and credit checks, or seek alternative online lenders for flexible terms.	Provides working capital for growth Often lower interest rates than credit cards Flexible repayment terms	Requires future repayment with a premium Collateral may be at risk if unable to repay
Crowdfunding	Reward-based	No repayment required for reward-based Tests market demand and customer interest Engages customers early	Low success rates and high dropout rates Risk to reputation if funding goal not met
Invoice financing	Apply through financing providers using unpaid invoices as collateral	Provides working capital without equity requirements Interest rates can be lower than loans initially Control over customers stays with the company	Repayment depends on timely customer payments Finance providers take a discount on the invoice amount
Revenue-based financing	Apply through financing providers to secure funding based on a percentage of future revenue	Aligns repayment with revenue performance Flexible repayment tied to revenue	Higher repayment ratio based on revenue share Stricter eligibility based on revenue potential
Strategic partnerships	Identify and approach complementary companies or use a partner matchmaking platform	Leverages partners' resources, customers and technology Often provides non-dilutive capital through revenue sharing or licensing	Requires sharing of value generated with partner Partners' goals may not fully align with the start-up's

‍Disclaimer

This article is for informational purposes only, is general in nature and does not consider your specific situation. It is not, and should not be relied upon for, financial, tax, legal or investment advice.