Back in June Oregon Entrepreneurs Network, in partnership with Umpqua Bank, hosted a conversation about the advantages and disadvantages when considering non-dilutive funding, where to start researching different deal structures, what type of business plan you’ll need to prepare, and what is a timeline to expect to secure funding.
Because of the popularity of the conversation we reached back out and asked some of the panelists their additional thoughts on The Non-Dilutive Funding Landscape.
How much time will a company spend trying to secure funding as it’s growing?
Sam: “Our diligence process typically takes less than a week once we have received all diligence items, which should be all readily available. Once approved, companies can expect to receive a one-page proposal and our standard lease agreement for review. Because there are no warrants, covenants, or liens with our model, there are normally very few changes made to documents. This, coupled with using our own balance sheet to fund the leases, means we can go from receiving the diligence package to funding equipment purchases in less than 2 weeks.”
Caroline: “We’ve all read how tough the fundraising market is for start-up founders right now and the terms can bite deeply into the founders’ ownership stake. For small businesses, there are many options now beyond bank loans and Angel investors, including the debt-based crowdfunding model SMBX offers. Often, we can launch a small business on our marketplace in a matter of weeks and deliver funding in under two months. For a lot of small businesses and start-ups, this has proven to be a game changer. When you’re growing your company you need access to capital in creative ways.”
Why is non-dilutive funding important for startups?
Caroline: “A small business owner or start-up founder who wants to maintain ownership and control of their company should consider non-dilutive financing. Some entrepreneurs may prefer repaying their investors over a longer term by giving up some equity. But for those who can begin repayment immediately, non-dilutive financing provides flexibility while maintaining ownership.”
Sam: “Non-dilutive funding can be an important part of the capital stack for any company selling equity to grow/run their business. Leveraging different types of non-dilutive funding like grants, loans, leases, revenue-based financing, etc. can have a meaningful impact on a company’s ability to hit milestones and therefor its ability to raise additional equity rounds, and to raise capital at higher valuations than previous rounds.
“Having financial partners (both dilutive and non-dilutive) that will be good, long-term partners is critical for any startup. Selecting “all weather” partners who will be supportive, nimble, and strategic in good times and bad can be “make or break” for a company.”
How to know if non-dilutive funding is right for your company? Is it hard to find?
Sam: “If you are selling equity in your company to grow your business, there is likely a flavor of non-dilutive funding that will fit your needs. It shouldn’t be difficult to find – ask your advisors, banker, VCs, and anyone else you’d go to for financial advice to make recommendations, or ideally, introductions on your behalf.”
Caroline: “Some companies start with a bank loan, but often look at alternatives like SMBX because they don’t like the bank terms, the process is too grueling, they don’t want to use their home as collateral, or they can’t get approval at all. At SMBX, the owner can raise money from their community and repay them. That’s a huge benefit a bank can’t offer, as well as, no personal guarantees.”
What are some of the disadvantages of non-dilutive funding?
Caroline: “Most loans (or non-dilutive funding) require the owner to begin repayment shortly after the loan is closed. Giving up some equity could be a better choice if the business’s cash flow is limited.”
Sam: “Certain companies may not be eligible for different types of non-dilutive financing – ie, you need to have revenue to qualify for revenue-based financing or need to have hardware/capex needs in order to work with an equipment leasing company.
“One disadvantage of loans/leases vs. equity or grants is they typically need to be paid back monthly. Certain types of loans and venture debt may require financial covenants, personal guarantees, and/or blanket liens on the business and IP.”
What should the first steps for a company be if they are looking for non-dilutive funding?
Sam: “When looking for any kind of financing it’s important to have your financial statements up to date and in a format that is easily understood by someone outside your company. This will help streamline the diligence/underwriting process and ensure clear communication between all parties.
“Do your homework before reaching out to a non-dilutive funding source – make sure you meet their basic requirements, if publicly available.
“Ask your advisors, banker, VCs/investors, and anyone else you seek financial advice from if they have connections they can introduce you to.”
Caroline: “The first step for any company looking for non-dilutive funding is to see if they are in the position to begin repayment immediately. If so, then it’s all about when do you need the money, the rates & terms, and who you’re paying! Once you crystalize those objectives, understand that your eligibility for certain funding and your strategy on deploying capital will also play an important role in this path, as well. And understand that most companies have multiple forms of non-dilutive funding, so there’s no one-size-fits-all solution. One difference between SMBX and bank loans is that there are no personal guarantees, and you can involve your customers in your growth process. Your community helped your business grow, and paying back your community can feel like a powerful and authentic way to continue growing your business. Nothing says brand loyalty louder than an investor-turned-customer.”