Early stage start-up founders need to evaluate a multitude of options when deciding how to fuel their growth. While venture capital is the typical route founders take, fundraising through this way is often time consuming and expensive from an equity and company control perspective. Typically, the alternative then is to go through traditional bank financing, but this also can be difficult as banks often find it difficult to assess a start-ups potential and its associated risks, especially if the business model is nascent or unproven. As a result, there has been a gap in the financing market for non-dilutive funding that is catered towards early stage start-ups. However, there are companies actively working on allowing early stage companies to access non-dilutive capital and neo.tax is one of them.
Accordingly, in this post, we're going to explore four options for non-dilutive financing, including current company offerings and examples.
Tax credits are the most straightforward method to introduce non-dilutive capital into your company. These credits are available for US tax paying companies to take advantage of and are often offered as a way to encourage further investment, innovation and growth for SMBs. One particularly important credit for early stage companies is the R&D tax credit. This tax legislation was passed to encourage US companies to invest in innovation, yet it is often not claimed by start-ups. As a result, start-up oriented tax companies have grown in demand as they look to service young businesses that are dedicating themselves to building innovative technologies. One such company is Neo.Tax which files the R&D credits on behalf of companies in 10 minutes and for an industry low fee of 10% of the credit amount. Neo.Tax was co-founded by an IRS agent of 25 years as well as seasoned entrepreneurs who understand start-up pain points intimately. When choosing a partner, it's important they have the right background and can provide you guidance on an ongoing basis. Neo.Tax is a robust and intuitive product that will soon be able to handle all your tax needs on a cheaper and faster basis.
Example: If you are eligible to receive a $200,000 tax credit as one of their customers has, you would keep $180,000 of that! It’s free to check if you qualify and can do so here.
Annual recurring revenue (ARR) or Monthly recurring revenue (MRR) is income a company can reliably anticipate every year or 30 days. This metric is commonly used among subscription or SaaS companies. . As SaaS companies become more prevalent, new forms of lending have emerged which evaluate the companies based on their ARR. Along with churn and renewal rates, ARR (or MRR) helps lenders assess if and how they will extend financing to a business. This type of lending is similar to venture debt, which allows companies to extend their runway without giving up equity.
Both Pipe and Capchase offer this type of solution. Their products provide options for recurring revenue companies to get paid upfront for their contracts. For example, Pipe companies (once approved), can offer up customer contracts that can be bid by investors. This allows these companies to ‘realize’ their monthly or quarterly customers all at once, while investors have the opportunity to invest in recurring revenue contracts they previously did not have access to. Capchase offers loans based on a company’s annual recurring revenue minus what is typically a 5 percent to 10 percent discount. Until this type of financing became available, SaaS companies mainly had to rely on debt, dilution, or bootstrapping to run their business. Now, companies can scale without dilution.
Example: Your company has a customer contract with Microsoft that is worth $15,000 a quarter. Based on the Pipe platform, investors could bid $55,000 for the contract. This would give you the upfront capital you need now, while giving the investors an ability to benefit from your operations via a $5000 discount to the contract. Or you're a company with $10,000 in monthly recurring revenue; Capchase may pay out $108,000 for the total $120,000 ARR in return.
Similar to recurring revenue based lending, another option is to get money upfront based on your inventory and sales. Clearco is a provider of such lending options, as they will invest funds for you to pay your inventory vendors. In return, Clearco plugs into your payment system and takes a percentage of sales until it recoups the investment ~ 6%. This type of lending is particularly attractive to e-commerce sites which depend heavily on suppliers.
Example: If a company is approved for $100K, Clearco would charge $106K and take payment as you make sales.
A business card offers credit for daily and recurring purchases. It’s a great way to extend your runaway as it essentially offers you a continual short term loan. Overtime, you should look to have your credit limit increased as your pool of available credit then also increases. A major differentiator between business cards is whether a personal guarantee is required or not. If it is required, you are putting your personal assets at risk. If you are using a credit card as a way to extend financing, you should avoid cards that require this guarantee. Companies like Brex, Ramp, SVB and many others offer this option and in general are tailored for the needs of start-ups (e.g. offering expense tracking, rewards, and higher limits).
Acquiring the capital necessary to fuel company growth is one of the biggest challenges for founders. While raising money from VCs is a traditional option for start-ups, there are increasing amounts of non-dilutive financing options now available. These options are beneficial to both the companies and its investors, as it allows them to continue operating without ceding equity or spending valuable time fundraising. Founders will find this particularly appealing as they then get to retain their control over a company’s operations while still boosting their growth and valuation.
Making a decision on financing is ultimately going to be down to the type of business and what stage of growth the company is currently in. For example, recurring revenue SaaS businesses will be able to take advantage of revenue share financing earlier than deep tech businesses. However, deep tech companies might be able to take advantage of more tax credits as their payroll is more dependent on technical resources.
The main takeaway is that venture funding should no longer be the only focus of a capital raise for companies. There are many options that are straightforward to take advantage of throughout the lifecycle of a company. Depending on the context of your business, the desire to retain equity and control, and your growth goals, a combination of non-dilutive financing can make a meaningful difference in your financial position.