The Complete Non-Equity Financing Guide for Startups [2024]

Founders of new startups rightfully take pride in getting their companies off the ground—but they also know that they’ll need capital to grow and scale. And understandably, giving up ownership and control to venture capitalists or private equity firms isn’t always an exciting prospect.

For these adventurous entrepreneurs, non-equity financing, also known as non-dilutive funding, can propel their startups into the future at the pace and in the direction of their choosing.

This guide will explain how non-equity financing works, the types of funding available, and the best ways to secure it.

What Is Non-Equity Financing?

Non-equity financing allows startup owners to fund their next initiatives without giving up a percentage of equity in the company. This means they can continue to control their direction and decision-making while accessing the money they need to grow.

Non-equity funding can come in many forms, including revenue-based financing (RBF), grants, startup loans, and others. While each type of funding works differently, they all provide capital while allowing startup owners to have the final say over where their companies are heading, how they get there, and how fast it happens.

What Is Non-Equity Capital Funding?

Non-equity capital funding is actually the same thing as non-equity financing–it’s just another term that investors and businesses use to describe the same thing.

Equity Funding vs. Non-Equity Funding

A business owner’s circumstances will dictate whether equity or non-equity funding is better for their company. The decision hinges on the company’s growth and cash flow and how much control they and their shareholders want to retain.

Equity Dilution

When companies raise capital through equity funding, their founders’ ownership, or equity in the company, becomes diluted. Non-equity funding, on the other hand, doesn’t dilute any ownership.

Ownership and Control

When a business owner raises capital through equity funding, they give up a percentage of ownership and may have to consult or seek approval from other stakeholders when making certain decisions.

By contrast, founders who use non-equity funding can continue to carry out their unique vision for their companies.

Duration and Amount of Funds

Equity funding frequently offers higher levels of capital than non-equity funding. Unlike traditional loans, equity funding–selling shares instead of borrowing–doesn’t have a predefined duration.

The duration for repayment of non-equity funding depends on the type of funding. For example, debt financing can be less than a year to 10 years while RBF might range from 6 months to five years.

Equity-Based Funding: Pros and Cons

Startup owners often turn to equity-based funding to get their ventures up and running. The cash infusion allows them to develop their products or services and build their businesses in exchange for an equity stake.

Of course, equity funding has both advantages and disadvantages for company founders.

Benefits of Equity-Based Funding

• High Funding Amounts: Venture capitalists and angel investors can often invest large amounts in businesses, which can help startups succeed.
• No Repayment: There’s no loan to repay and no interest because founders are selling ownership shares in their companies.
• Added Value: Venture capitalists and angel investors can often provide networks and business experience.
• Further Funding: An established relationship may make it easier to ask for additional funding if necessary.

Issues With Equity-Based Funding

• Dilute Ownership: With equity financing, the founder’s ownership shrinks and may continue to drop with additional rounds of capital funding.
• Loss of Control: Business owners may no longer exclusively decide the vision and direction of their companies.
• Shared Profits: Angel investors and venture capitalists own shares of the company and will claim profits based on their percentage of ownership.

Business owners must weigh these benefits and drawbacks carefully when deciding on the type of capital funding they want to pursue for their startups.

Non-Equity Financing Options for Startups

Entrepreneurs have several options for securing startup loans, including the following:

1. Revenue-Based Financing

Revenue-based financing (RBF) is a good option for companies with high monthly recurring revenue (MRR) and high annual recurring revenue (ARR). This form of non-equity financing allows the business to receive its capital upfront and pay back the money over time based on a fixed percentage of revenue.

Pros:

• Quick access to capital
• No dilution in ownership
• No minimum payment

Cons:

• Less funding than venture capitalists
• Recurring revenue required
• Repayment starts immediately

Best For: Businesses with cash-flow issues that have high monthly recurring revenue.

Efficient Capital Labs offers up to $1.5 million in as little as three days at a transparent fee of 10%–14%, with a typical repayment period of 12 months.

Owners of software-as-a-service (SaaS) businesses that need funding will find Efficient Capital Labs uniquely suited to meet their financing needs.

With a repeat customer rate of more than 75%, SaaS founders can feel they will have a trusted partner for growth.

Connect with ECL today to get the funding required to continue to grow.

2. Bank Loans

Another popular option is to take out a bank loan, either as an individual or through a business. This traditional form of non-equity financing is available through financial institutions like banks, as well as the Small Business Administration.

Pros:

• Maintain ownership and control
• Predictable repayment amount and schedule
• Low cost for capital

Cons:

• Qualification requirements
• Collateral may be necessary for startups
• Cash flow not available to meet payment

Best For: Startups that have a strong business plan, good credit, and collateral.

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3. Grants

Business owners tend to like grants because they provide some or all the needed capital without a requirement for repayment. They’re available from governments, nonprofits, and private foundations.

While grants are attractive because they don’t have to be repaid, most come with other types of requirements, including reporting.

Pros:

• No repayment requirement
• Validates the receiving business
• Can be matched to business or project

Cons:

• Lots of competition to access funds
• Long application process
• May come with stringent restrictions or requirements

Best For: Businesses with models and goals that align with the government agency or foundation issuing the grant.

4. Investor Debt Financing

Investor debt financing is broadly used for any type of debt issued by investors, including traditional loans, bonds, and other debt instruments. It’s generally issued based on a company’s creditworthiness and revenue stream and may require collateral.

Borrowers must repay their debts with interest.

Pros:

• Maintain ownership and control
• Tax-deductible interest
• Fixed repayment schedule
• Can enhance credit rating

Cons:

• Obligation for repayment
• Interest costs
• Risk of putting up assets as collateral
• Potential to over-leverage company

Best For: Business owners who don’t want to give up control of their companies or miss out on profits by sharing them with investors.

5. Invoice Factoring

For business owners who send invoices to customers, invoice factoring might be a non-equity financing method worth pursuing.

With this arrangement, the business owner sells their invoices to an invoice-factoring company at a discount and receives 70%–90% of the value for them up front, which provides cash flow. The factoring company then collects from the business’s customers, takes out its fee, and remits the remainder to the business.

Pros:

• Most value received up front
• No equity dilution
• Increased cash flow
• Doesn’t incur debt

Cons:

• Reduced profit margins
• Possible hidden fees
• Qualification requirements

Best For: Companies that need an expedient way to maintain working capital and whose customers or clients pay after receiving an invoice.

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6. Crowdfunding

Online crowdfunding platforms raise capital by soliciting small contributions from a large number of people. Compared to other capital funding options, the amount raised is often limited, so it’s likely to be used in conjunction with other non-equity investment options.

Pros:

• Doesn’t require equity sacrifice
• The market funds the service or product
• Builds brand awareness and loyalty

Cons:

• Requires a full marketing campaign
• High platform fees
• Scamming can undercut capital goals

Best For: Startup owners who are good at communicating the value of their companies and engaging with a broad audience.

7. Merchant Cash Advance

Merchant cash advances let business owners borrow against credit card receipts. It works pretty much like a personal cash advance: a business owner receives the sum of money they need and pays it back over time.

The difference is that the lender will deduct a portion of a company’s debit and credit card receipts until the loan is repaid.

Pros:

• Fast access to cash
• No credit check
• No collateral

Cons:

• Much higher cost than traditional loans
• Deductions from daily earnings
• No reporting to credit bureaus

Best For: Restaurants, retailers, and other businesses that need to purchase inventory, cover payroll, and meet other operational expenses.

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8. Peer-to-Peer Lending

Peer-to-peer lending is an alternative to traditional financial institution lending. It uses online platforms to connect borrowers directly with lenders.

There are four key differences between peer-to-peer lending and traditional bank loans: qualifying is easier, the application process is shorter and done online, individuals or a group are the actual lenders, and interest rates may be higher for poor or fair credit.

Pros:

• More likely to accept fair or poor credit
• Loans are funded quickly

Cons:

• Higher interest rates than traditional loans
• Higher fees (and therefore higher overall cost)

Best For: Borrowers who might have trouble qualifying for a traditional bank loan or those with good credit who need capital quickly but at a comparable rate.

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9. Convertible Notes

A convertible note is a type of short-term debt that can turn into equity in the future. The investor loans the business owner capital, and the business owner agrees to repay the loan at some point in the future, usually when another round of financing is needed.

Most notes convert to equity, but it’s not mandatory.

Pros:

• No immediate dilution of equity
• Faster to issue than equity
• Fewer legal fees than equity

Cons:

• Initially sits on books as debt
• Accrues interest
• Potential to dilute ownership

Best For: Startup owners who are in the early stages of growth or have uncertainty about their future valuation.

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10. Venture Debt

Venture debt financing is a loan with interest rates higher than conventional bank loans. To take advantage of this method, business owners must have already acquired venture capital. It’s not uncommon for venture debt financing to be employed along with equity-based funding.

Pros:

• Bridge operational needs
• Longer repayment terms

Cons:

• Requires venture capital
• Can lead to equity dilution via warrants
• Higher interest rates

Best For: Early-stage companies with the potential for high valuation growth but no track record of generating revenue.

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More About Non-Equity Financing

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Let’s take a look at some FAQs on non-equity funding.

Can you borrow money without equity?

You can borrow without equity in the form of a personal loan. With a personal loan, borrowers don’t need collateral, they can be approved quickly, and they can receive money within 24 hours.

The downsides are high interest rates and limited loan amounts.

What is a non-equity loan?

A non-equity loan is another term for non-equity financing, where the borrower doesn’t have to provide ownership or equity in a business or property as collateral to secure the loan. Loans can take many forms of debt financing, including unsecured loans approved based on the borrower’s creditworthiness.

What is an example of a non-equity option?

Different from non-equity financing, a non-equity option is a type of financial derivative whose underlying value is based not on an equity (stock) but on other assets. This could be any option whose value is based on a commodity, such as gold.

Work With the Best Non-Equity Financing Company

Business owners who need capital but want to maintain control of their companies may decide that pursuing non-equity investment options is the best course. However, no one can make that decision for them: they must examine their particular needs and goals and choose the option that best fits their business needs.

For SaaS business owners, revenue-based financing through Efficient Capital Labs aligns well with a business model that exhibits monthly recurring revenue and annual recurring revenue as key performance metrics.

The financial funding solutions from Efficient Capital Labs can help SaaS businesses build credibility, increase cash flow, and elevate market standing. ECL can offer up to 65% of projected revenue as upfront capital, allowing entrepreneurs to extend their runway and get better valuations in future rounds of financing.

Contact ECL today to get financing