Non-Dilutive Financing Options
In the UK 20% of businesses fail within their first year, and nearly 60% of businesses fail after their first 3 years. This is mainly due to a lack of working capital. Simply put, most businesses don’t have enough money to keep their business running. Most companies don’t realise that there are other ways to finance their business aside from equity financing. This is where introducing Non-Dilutive financing can help save companies from running out of money. Here are five non-dilutive finance options that companies use to mitigate risk and maintain equity.
Venture Debt
Venture debt is a form of debt financing provided to startups and early-stage companies that are backed by venture capital (VC) firms. It allows companies to access capital without diluting ownership. This debt is usually secured by company assets or future revenue and is used to extend the cash runway between equity rounds, finance capital expenditures, or reduce dilution from raising more equity.
Invoice Financing
Invoice financing is a type of business financing where companies use their outstanding invoices (accounts receivable) as collateral to secure funding. This allows businesses to receive cash advances on the value of their unpaid invoices before the customers actually pay them. It is especially useful for businesses facing cash flow issues due to slow-paying clients.
Revenue Share Financing
Revenue Share Financing (RSF) is a flexible form of business funding where a company receives capital from investors in exchange for a percentage of future revenues rather than fixed loan repayments or equity. Instead of paying a fixed interest rate or giving up ownership, the business agrees to pay back the loan as a percentage of its monthly or quarterly revenue until a predetermined repayment amount is reached. Revenue Share Financing is often used by businesses with consistent or growing revenue, such as SaaS companies or e-commerce businesses, to fund growth initiatives like marketing, inventory purchases, or expansion.
Recurring Revenue Financing
Recurring Revenue Financing (RRF) is a type of financing where businesses with predictable, recurring revenue streams (like subscription-based models) can secure funding based on the value of their recurring revenue. This form of financing is particularly common for SaaS (Software as a Service) companies, membership businesses, or other firms that rely on a subscription model, where customers make regular, ongoing payments. This type of financing is often an ideal choice for subscription-based companies that need capital to grow but want to avoid taking on traditional debt or giving up equity.
Asset Financing
Asset financing is a type of business financing that allows companies to obtain funds by using their existing assets or purchasing new assets. The assets, such as equipment, vehicles, machinery, or even inventory, are used as collateral to secure the loan. This enables businesses to access capital without needing to sell equity or rely on unsecured loans. Asset financing is typically used by businesses that need expensive equipment or capital items but want to spread out the cost over time, preserve cash flow, or don't qualify for traditional bank loans. It's also attractive because lenders are more likely to approve financing if there are tangible assets securing the loan.
Why is it Important to Diversify Financing?
Diversifying financing is crucial for businesses to manage cash flow, reduce risk, and avoid over-reliance on equity. Non-dilutive options like venture debt, invoice financing, and asset financing provide funding without giving up ownership, helping companies maintain control. These methods allow businesses to access capital for growth, cover working capital needs, or manage slow-paying customers. Revenue share and recurring revenue financing offer flexibility by aligning repayments with business performance. By tapping into different financing sources, companies can balance their funding needs, extend their cash runway, and increase resilience, reducing the chances of running out of money. Written by Caleb Reynolds and Pryce Pitchford, Entrepreneur Relations Analyst at Angels Den, Europe and UK’s largest angel-led finance platform helping early-stage companies and SMEs get easy access to growth capital.