Understanding the risks involved is crucial when considering financing a firm without giving up stock. The traditional method of starting a business is to raise money through diluted fundraising. In exchange for a predetermined sum of money, you offer a certain percentage of your company. You obtain the funding required to achieve your objectives. And the investor gains ownership of a portion of the startup that will increase in value over time.
The most recommended way to fund your SaaS startup is to apply for non-dilutive funding. With Non-dilutive financing, you do not transfer any ownership stake in your company. This article discusses how to use non-dilutive funding for a SaaS startup
What Is Non-Dilutive Funding?
Non-dilutive fundraising is a kind of finance for startups or any business. Non-dilutive financing is a sort of financing in which you do not transfer any ownership stake in your company. In other words, the company gets the money it needs to achieve its objectives without having to sell off any of its assets to outside investors.
Non-dilutive capital not only lessens the burden. It serves as startup finance that allows owners to secure more advantageous funding arrangements. This is because the investors aren’t as concerned with making a big profit. Non-dilutive funding serves as a good source of finance for entrepreneurs. The longevity and viability of the company, which much more closely aligns with its objectives. This attracts non-dilutive funding agents.
Importance of Finance for Startups
Financing is particularly crucial during the early phases of your firm. Expanding into new markets and regions is expensive. This is because it provides the funds required for this expansion. You will need to rely on finance if your firm isn’t profitable to pay for the costs associated with expansion.
Non-dilutive funding is often used by banking institutions to launch their startup banking company. This is also applicable to small businesses, or full-fledged enterprises. Software development companies can also use non-dilutive funding for their software startup financing.Â
Funding agencies can help quickly raise a set amount of money. This is so that you can scale on your terms and without limitations. They also give you access to money management tools so you can budget, save, and use your money well.
Non-Dilutive Methods of Startup Funding
There are many ways to raise money for your business without giving up equity. There are many ways to get money for your business without giving up equity. Examine each of these in turn.
Consider Loan Agreements
One of the easiest ways to finance your startup without giving up equity is through loan agreements. Simply said, a bank or other financial institution extends this credit line to a startup founder. Such a loan may be backed by either personal or corporate assets. Alternatively, based on the viability of the business concept or the founder’s credit history, it can be an unsecured loan.
The startup entrepreneur receives the money required to advance his or her company to the next fundraising milestone. the lender benefits from the interest the borrower must repay on the loan.
You’ll have a long time to pay back a small company loan, which is a benefit if you use one for capital. Small business loans often have periods of three to five years, making them long-term debts. A further benefit is that the income statement includes the interest payments as liabilities. This is before determining the tax due.
Apply for Grants
Applying for a business grant is another method to finance your startup without giving up equity. Frequently, there is no need to repay these grants. They are there to support business owners as they establish their enterprises.
Philanthropists, academic and research institutions, and other commercial entities all provide these funds. Grants are frequently approved when a business plan with a strong concept and a realistic view is used. Although the application process is typically arduous. These awards often only help start-up companies attain a predetermined goal.
The most desirable and challenging kind of non-dilutive support is granted. Grants are not repaid, in contrast, to venture debt and small business loans.
Grants serve as finance for start-ups and small enterprises and are most frequently found in the non-profit sector. The release of more funding at a later point will be directly impacted by the regular financial reports.
Venture Debt
A sort of loan available to businesses that have already received venture capital is known as venture debt. It is provided by non-bank lenders or specialty banks and often serves venture funding. It is used for the purchase of equipment that increases the asset side of the balance sheet. Venture debt is one of the various types of working capital investment that your business is eligible to seek.
Term loans for expansion capital where businesses use their unpaid bills as a basis for borrowing are examples of venture debt. Repayment durations range from twelve to forty-eight months. Lenders will often offer one-third to one-half of a company’s total equity in the form of venture debt. Variable interest rates.
Vouchers and Bonds
Governments typically distribute vouchers, while other commercial entities occasionally do as well. Even though vouchers have no cash value, they do allow a start-up business to use the voucher to obtain something valuable.
This could be access to resources like buildings, tools, services, or even knowledge. The overheads that would otherwise be necessary to obtain the same goods or services are eliminated by using vouchers. It is a type of unrestricted funding.
Bonds and vouchers are two types of financial instruments for fundraising. A voucher can be used in place of cash because it is effectively a “promise to pay.” In exchange for an agreed-upon sum of money invested, a bond is issued. The corporation pays the interest during the bond’s duration and the principal at maturity in place of equity.
License Agreements
Negotiating a license agreement with an existing company can allow you to receive non-dilutive finance. This could be done to obtain funding in exchange for merging the name, goods, or services of the established company alongside those of the startup company.
Are your goods, services, or procedures anything that other businesses could be eager to license? This is a clever approach to raising money without having to give up equity in your business. The usage of well-known cartoon characters in television advertising is one of the more prevalent forms of licensing. For those, the advertisers compensate the creators.
As an alternative, a license agreement can allow one business to use a startup brand or intellectual property for a monthly or quarterly fee.
Royalty Financing
“Royals” are the sums of money derived via a licensing deal. It works in much the same way to use that income as a guarantee for debt financing as it does to use your company’s accounts receivable. Additionally, royalties can be sold outright. This eliminates the company’s future income stream. It also provides an immediate source of working capital.
Royalty finance is another method of non-dilutive funding. Instead of buying an equity part of the firm, investors buy a portion of expected future revenue in this scenario.
A portion of the revenue earned by the entire company or just one product or service may be included in royalty financing. In this manner, the startup’s founder receives the necessary investment. They do this without ceding any ownership or control.
This may present networking chances since investors would want your company to produce big profits. To help the startup, fulfill its potential, they are typically eager to share access to other business partners and resources.
Use Tax Credits
Good finance for a start-up is possible through tax credits depending on the area in which it operates. In essence, a tax credit lowers the amount of taxes that must be paid by a company. Although this again lowers overheads, it is typically only applicable after the money has already been spent.
Tax credits do not increase the asset column’s value. They enhance retained earnings. This is equivalent to shareholder equity and decreases the tax liabilities on the other side of the balance sheet. Tax credits are non-dilutive. Take advantage of tax advantages wherever you can because they improve return on equity rather than diminish it.
Convertible Notes
A short-term loan arrangement with an investor is known as a convertible note. The investment is handled like any other loan rather than taking it for immediate equity.
However, the investor receives a guarantee of shares in the company at that valuation. This is done rather than having to repay the loan and interest over time with cash.
The next funding round sees the full completion of this deal. As an illustration, an investor gives a startup a loan of $100,000. For that sum, a convertible note arrangement is executed. Other investors are drawn to the company once it has accomplished its initial objectives and needs additional funding.
Annual Recurring Revenue Lending
With the help of ARR loans, Businesses can increase their returns. This can be done without giving up company ownership. An organization’s subscriber base or the yearly cost of a single subscription are both referred to as annual recurring revenue or ARR. The metric is used by software businesses like Spotify, Adobe Creative Cloud, and Netflix to assess their earnings.
Alternative finance sources frequently base their evaluations of SaaS companies on their ARR. The ARR assists the lender in deciding whether or not they want to develop a long-term relationship with the company. It is very similar to venture debt.
Structured Equity Products
Structured equity products are investment packages that come with a variety of assets. They are also interest-linked connections. The products come from securities, an index, a selection of stocks, commodities, debt issuance, foreign currency, or a bundle of those.
In other words, the investment return is based on an underlying asset that has fixed characteristics. This can be a certain degree of capital protection or a specific maturity date. These types of assets can help raise funds without diluting your company.
Conclusion
Non-dilutive capital is frequently thought to be most beneficial during a company’s founding. But organizations of all sizes rely on it at various phases of growth.
Non-dilutive finance is a crucial tool for all companies including SaaS companies. This helps businesses make sure they can continue to generate equity during the early stages of growth.