When people think “funding”, they usually think of banks, big-time investors, or flashy venture capitalists.
These are all common avenues for securing growth capital, but they also require you to give up a percentage of your ownership, diluting your stake in the business you’ve worked so hard to build.
Unlike equity financing, non-dilutive funding keeps you in the driver seat. For growing merchants and brands, it can be an excellent path toward greater growth on your terms.
In this article, we’ll explain exactly what non-dilutive funding is, the various types of non-dilutive capital available, and how to choose the best financing for your business.
What Is Non-Dilutive Funding?
Non-dilutive funding refers to financial support or capital that a company receives without giving up equity or ownership in the business. Unlike traditional funding methods such as venture capital or angel investments, non-dilutive funding does not require the company to issue new shares or dilute existing shareholders’ ownership.
Examples of non-dilutive funding include grants, sponsorships, awards, government subsidies, and loans that do not require equity stake or collateral. This type of funding is attractive because it allows businesses to raise capital while maintaining their current ownership structure.
Dilutive Funding vs. Non-Dilutive Funding
The main difference between non-dilutive and dilutive funding is right there in the name. With non-dilutive funding, you’re not diluting the ownership of your business.
This is different from dilutive funding, also known as equity funding, where investors purchase company shares in exchange for capital.
Common types of dilutive funding include:
- Venture Capital (VC): A type of private equity where the investor provides capital to startups or small businesses with strong growth potential. Despite the high risk of this type of investment, the possibility of substantial ROI is attractive for venture capitalists. However, in return for these funds, you’re often required to give up a portion of your company’s equity.
- Angel Investing: Angel investing is another form of dilutive funding, where wealthy individuals provide capital for businesses in return for equity or convertible debt. Like venture capitalists, angel investors often provide more than just money — they can also provide valuable management advice, as well as key business contacts.
- Equity Crowdfunding: This financing option allows a broad group of investors to fund your business in exchange for equity. Businesses can solicit investments from hundreds or thousands of individuals, primarily through online equity crowdfunding platforms.
Unlike these forms of financing, non-dilutive funding doesn’t require you to relinquish control of your business. But that doesn’t mean it’s free money.
With non-dilutive funding, you are still accountable to repay the funding you receive, usually via interest or fees. Another important point of differentiation is repayment.
Dilutive funding does not typically require repayment, as investors have a share in the company and recoup returns from its performance. Non-dilutive funding, on the other hand, will often require repayment, with terms based on the company’s risk profile and the nature of the funding.
Types of Non-Dilutive Funding
Here are some of the most common types of non-dilutive funding to help you maintain ownership of your company, while securing the capital you need to fuel future expansion.
1. Loans
Loans are possibly the most common form of non-dilutive funding. Typically offered by banks, credit unions, or other financial institutions, loans are a reliable source of capital for many business owners and can come in a variety of forms.
While small business loans like those from the Small Business Administration (SBA) can be an effective source of non-dilutive capital, obtaining a business loan can be a challenge for newer e-commerce businesses without a long trading history or significant assets.
That’s where specialized e-commerce loans can make the difference. The right kind of e-commerce funding, such as a working capital line of credit, can provide substantial capital for your growth strategies without the demands and restrictions often associated with standard bank loans.
All types of retailers, from successful DTCs like ThirdLove to legacy brick-and-mortars like Neiman Marcus, regularly use business loans and credit facilities to fuel their e-commerce and omnichannel growth.
However, these funding solutions do come with interest rates and repayment schedules. Make sure you review the terms, interest rates, and repayment conditions for a solution that will drive your business forward, not hold it back.
2. Revenue-Based Financing
Revenue-based financing is an increasingly sought-after method of non-dilutive funding among e-commerce business owners. This type of financing includes merchant cash advances, invoice factoring, marketplace loans, and other financing solutions. With revenue-based financing, you pay a percentage of your future revenue in exchange for upfront capital.
The repayment schedule is directly tied to your monthly revenue, with lower repayments during slower periods. For e-commerce businesses with slow marketplace payout schedules and regular seasonal sales fluctuations, this flexible repayment structure makes revenue-based funding one of the most attractive financing options.
It is typically offered by specialized lending platforms and fintech companies, each with its own set of terms and fees. Be sure to review your options closely.
Eligibility requirements are also key to accessing revenue-based financing. Generally, lenders look for businesses with a solid sales history and robust growth projections. To improve your chances of qualifying, focus on maintaining accurate and up-to-date financial records that clearly demonstrate your business performance.
3. Grants
Grants can be an excellent source of non-dilutive funding because you don’t have to pay them back. They are often provided by governmental agencies, foundations, and corporations in an attempt to stimulate growth in specific sectors.
As a grant recipient, you’ll likely need to provide updates on how funds are used and progress made in line with the grant’s objective. However, if the grant aligns well with your e-commerce business, meeting these conditions can provide valuable exposure to grant providers and their networks, opening up even more opportunities for future funding and partnerships.
Though somewhat rare, grants can show up in surprising places. Some examples include business incubators like Sephora’s Accelerate program designed to help emerging beauty brands through grants, investor connections, and an opportunity to launch in Sephora North America. Alibaba’s Manifest Grants Program also awards grants to US-based small businesses with a focus on sustainability and diversity.
Whether you’re exploring corporate or government grants, if you can align your e-commerce venture with a grant’s purpose and successfully navigate the application process, you may find yourself with an invaluable financial leg-up that doesn’t dilute your ownership.
4. Crowdfunding
With crowdfunding, you showcase your e-commerce product or idea to the “crowd.” In return, everyday people get the opportunity to invest in the “next big thing”.
Crowdfunding can be unpredictable, but it can also be a good source of non-dilutive capital for early-stage businesses. Online platforms like Kickstarter and Indiegogo make fundraising easy by collecting small individual contributions from a large number of people.
Backers receive rewards such as your product once it’s commercially available or other special perks. Since you’re sharing your product with a larger audience, crowdfunding can also serve as a powerful marketing tool for building brand awareness.
Take CoolMiniOrNot (CMON), for example. The miniatures brand ran 27 Kickstarter campaigns and raised $35 million, an astounding amount of non-dilutive funding. But crowdfunding isn’t necessarily just for startup capital.
For example, Cards Against Humanity’s epically irreverent 2015 campaign asked Black Friday shoppers to give $5 “for nothing in return”. The company raised $71,145 which it split evenly among its 17 employees, who then shared updates on social media of how they spent the money.
Keep in mind, running a crowdfunding campaign requires time, energy, and even money. To be successful, your campaign needs to be engaging, with a convincing pitch and marketing plan to gain traction with the right crowd.
5. Venture Debt
Venture debt is often confused with venture capital, but they are not the same. Venture debt lenders provide loans that differ from dilutive investments in that they don’t require an ownership stake.
The lender, typically a specialty finance firm, will offer a loan that usually ranges from 20% to 40% of a company’s valuation. The loan often needs to be repaid within three to four years, once the company is successfully up and running.
Many e-commerce businesses opt for venture debt after they have already had a successful funding round as a way to add additional operating capital without diluting ownership.
However, unlike other non-dilutive providers, venture debt lenders can force companies into bankruptcy if they are unable to repay the loans. This can be a risky move if sellers are not confident about significantly increasing their sales and returns within the repayment period.
6. Tax Credits
Tax credits are non-dilutive funding that take the form of deductions.
In this case, you’ve already spent the money and are receiving non-dilutive funding in the form of refundable or non-refundable tax credits and vouchers.
Here are some common types of tax credits to explore:
- Research and Development Tax Credit: Many are unaware that the Research & Development (R&D) tax credit is not solely confined to laboratories — it’s also available to retail businesses. If you’re investing in creating or enhancing a product, you may be eligible for this type of funding. Even expenses related to package design might qualify.
- Employment Opportunity Credits: Your staffing decisions could influence your eligibility for non-dilutive funding. For instance, the Work Opportunity Tax Credit is available to firms that hire individuals from specific groups that often face significant employment barriers. The Disabled Access Credit can also be available if you’re enabling disabled individuals to contribute meaningfully to your business.
- Green Energy Tax Credits: With environment-conscious practices coming into focus, many governments are rewarding businesses with green tax credits. If your company makes operations more energy-efficient or uses renewable resources, you may benefit from this type of tax credit.
- State-specific Tax Credits: State governments often provide tax credits to stimulate economic growth. These can vary by location and might include credits for creating jobs, promoting tourism, or investing in underdeveloped areas. Check your state government’s website for opportunities that may suit your business.
After grants, tax credits are about as close to free money as you can get. But they can only be secured after you’ve spent money on your investment.
If you need capital to alleviate immediate cash flow issues, purchase inventory, or take advantage of a time-sensitive promotion or ad campaign, you’ll need a faster funding solution like a merchant cash advance or line of credit.
Benefits of Non-Dilutive Funding for E-commerce Businesses
Now that you know more about the various types of non-dilutive funding available, let’s take a closer look at the many advantages this type of financing can deliver.
Here are some of the key benefits of non-dilutive capital.
- Complete control: You maintain full ownership and decision-making over how the business grows and where funds are invested.
- Better terms: Unlike VCs, non-dilutive lenders aren’t worried about large returns. They want to work with healthy businesses towards long-term growth, not quick returns.
- Fewer strings attached: Without the pressure of investors to answer to, non-dilutive funding options can provide the capital you need with fewer commitments in exchange.
- No collateral required: Dilutive investors often require personal guarantees or business collateral like real estate, inventory, or equipment. On the flip side, many non-dilutive funding partners won’t ask for collateral. This is a big advantage for sellers who don’t want to risk their assets, or for brands that haven’t built up many assets yet.
- Flexible repayment terms: The flexibility of repayment is probably one of the most beneficial aspects of non-dilutive capital.
For example, with a non-dilutive option like a cash advance or daily advance factoring solution, your funding partner provides the capital needed for growth, and in return, you’ll make monthly payments based on a percentage of sales until the amount is cleared.
This is especially helpful for brands with a high amount of seasonality or regular supply chain issues.
Is Non-Dilutive Financing Right for You?
Modern retailers no longer have to rely on venture capital firms, credit cards, or traditional loans as their primary sources of business funding. With a range of powerful non-dilutive funding options in the market, the biggest challenge isn’t picking the right type of funding — it’s finding the right partner.
At SellersFi, we go beyond traditional debt funding to deliver bespoke financial solutions for the most common and challenging e-commerce growth scenarios.
Because different sellers have different needs, based on different stages of growth.
Our team of experts will work with you to review your recurring revenue, assess your short-term and long-term goals, and help you find a funding solution that aligns with your business plan.
Register today with no strings attached to find out how much funding you could be eligible for.
