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Non-dilutive financing: 5 interesting choices for SMBs
Noémie Kempf
April 25, 2024
4 min

How to use non-dilutive financing to grow your business

Cash shortages are a problem faced by many business leaders and finance directors. And they feel more common and more acute by the quarter. 

Both internal and external factors complicate the search for funds or add extra pressure. A company under severe financial strain or a rapidly changing market can have a major impact on an organisation's future. So it's best to make informed decisions. 

Whatever your stage of development and your situation, you essentially have two choices in front of you: non-dilutive financing or, on the contrary, dilutive financing

In this article, we'll help you take stock of these two options and choose the solution that best suits your needs. 

What is non-dilutive financing? 

Non-dilutive financing is a method of financing for organisations of all sizes which has no impact on your shares or the amount of equity you retain. In other words, it doesn’t dilute shareholder ownership. Using this type of solution lets companies invest in new projects or accelerate their growth, without sacrificing governance, decision-making power, or their share in profits in the long term. 

Conversely, dilutive types of financing see you receive a sum of money in return for external investors acquiring a stake in the company. These creditors may be legal entities or individuals. This is very common in startup venture capital fundraising, and in mergers and acquisitions. 

Apart from the dilution of shareholder power, what is the difference between these two types of financing? In practical terms, dilutive financing can also be more difficult to obtain. This is because it comes mainly from so-called "professional" investors (such as investment funds). As a general rule, these investors are mainly interested in projects with high growth potential and offer demanding conditions. 

Why opt for non-dilutive financing?

As an SMB founder or manager, are you best to leverage debt or equity? Non-dilutive financing offers a number of advantages for companies, particularly small and medium-sized businesses: 

  • Maintaining governance over your organisation. The first advantage - and the most significant - is the ability to raise funds without reducing your existing shareholding. You maintain control over your strategy, and stand to benefit fully from the future value of the company. For this reason, it’s accepted wisdom that non-dilutive financing is always “cheaper” than handing over equity, even if you have to pay interest or fees in the immediate term. 
  • Fast, flexible funding. Does your business urgently need funds to unlock supplies or seize an opportunity? This is an ideal use for non-dilutive financing, particularly through the modern platforms available today. As a general rule, funds are received more quickly than with dilutive financing.
  • Potential tax savings. You read that right: despite the interest attached to non-dilutive financing, it may be tax-deductible.
  • Less red tape. Non-dilutive financing platforms are generally accessible to more companies, and with fewer hurdles. The formalities involved in your application will generally be lighter. This means you can concentrate fully on your business and the operational and strategic management of your company. 

5 non-dilutive financing options for SMEs

When you need extra cash quickly, non-dilutive financing is the best solution to explore in the first instance. But in practical terms, where should you turn? There are several solutions available for SMBs. 

Here is our selection of the most interesting, which you can combine with each other, and/or use to complement your equity financing:

1. Receivables financing

Accounts receivable financing is a non-dilutive solution for financing your company's operating cycle. This form of short-term financing involves using receivables — unpaid customer bills — as collateral to obtain funds. 

Receivables are amounts owed to a company or person by another entity, often in the form of unpaid invoices, loan agreements or credit sales. This non-dilutive financing can also be combined with a guarantee against non-payment. 

There are several types of receivables financing: 

Factoring (or Dailly) 

Factoring selling your company’s invoices to "factors". These factors collect the assigned invoices on your company's behalf. This is an attractive solution for collecting the amount owed by your debtors immediately, in return for a percentage of the sum recovered. 

With factoring, you can benefit from a cash advance without diluting your capital. It is, however, an option reserved for companies that are already well established. You will need to present a sufficiently large volume of invoices to be recovered for the operation to be attractive to the factor. 

Accounts payable financing

Accounts payable financing, also known as invoice financing, is a form of short-term business credit. It involves using your accounts payable (the amounts you owe your suppliers for goods or services you've received but not yet paid for) as collateral to obtain funds from financial institutions or other parties. 

This practice lets you contract a debt with the lender, secured by the amount of accounts payable you hold. This type of financing can be used to improve a company's cash flow and access cash to cover your operational needs, invest in growth or meet other financial obligations. 

Warning: this type of practice requires excellent supplier relationship management, with plenty of trust. You must be in a position to repay the debt contracted!

2. Bank loans 

A loan lets individuals or legal entities (in this case, your company) request a sum of money for a predetermined period and repayment rate. Most often these come from banks, but there are also private lending organisations. 

Again, make sure that your company has sufficient cash flow to repay its bank loan, and the associated interest too. The lending organisation may also require collateral, including property, equipment, or your inventory. 

3. Crowdfunding 

This form of participatory financing involves inviting your potential customers, friends, and other contributors from outside the company to finance a project or a stage in your company's development. 

This type of non-dilutive financing is generally obtained by sharing a campaign on a dedicated platform, where contributors can invest in exchange for early access, a limited edition reward, a reduced price, or some other enticing benefit. 

Another advantage: as well as releasing funds relatively quickly (bearing in mind that a campaign needs to be prepared well in advance), crowdfunding can help you validate your project with a wide audience. But beware of operator fees — which can be as high as 10% and the high level of competition on these platforms!

4. Grants 

Finally, grant funding can be particularly attractive for small and medium-sized businesses. As well as being non-dilutive, it is non-repayable. Granted by a public or private body, the aim of the subsidy is to support your activity (via financial aid or a tax credit, for example). 

Bear in mind that these "free" grants are only awarded under certain conditions. For example, your company must support local economic development, promote innovation in a particular field, or create new jobs. 

Grants also require you to fill in a full application form and report regularly and exhaustively. What's more, the sums awarded are generally limited. 

Get non-dilutive funding with Defacto

Are you looking for fast, non-dilutive financing? Give Defacto a closer look. Our tool enables very small businesses and SMBs to access capital in just a few clicks, through flexible short-term financing options tailored to their position.

In less than 27 seconds, you can open a credit line for your debts and receivables.

Get access to instant pay-as-you-go financing to cover stock, marketing, and B2B receivables to grow on your own terms.
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