Non-dilutive funding refers to any kind of funding that doesn’t require you to give away any form of business equity to your investors. This means you receive monetary funding without giving out even a single share of your company. Examples of non-dilutive funding include loans, grants, tax credits, vouchers, subsidies, and the like.
It’s said that non dilutive funding is the most popular option for startup founders because it offers monetary support all the while allowing for the non-surrender of business ownership to creditors.
Non-dilutive funding can help to accelerate your business growth to the point where you’re comfortable raising funds from venture capitalists interested in getting a piece of your company.
Despite being a popular financing option, non-dilutive funds such as banking institution loans are usually challenging to obtain and grants are available for those that can meet specific requirements only. Further, non-dilutive funds can become a costly financing option for your business if not used right.
To avoid situations where borrowed funds become costly and an unbearable liability to your business, below are some of the common mistakes made by entrepreneurs when raising non-dilutive funding. Read through them one by one to avoid committing them when you decide to pursue non-dilutive funding for your budding business.
- Not Being Prepared Enough
Raising any form of funding, disruptive or non-disruptive, requires you to be adequately prepared with information about your market, your own business, and the viability of your products. You must provide your prospective lenders with a good understanding of the industry you’ll be playing in. To do so, you’ll need to spend ample time in advance analyzing different resources.
You’ll also need to prepare visual presentations that’ll aid in making your case. You might need to hire someone to do this for you because potential lenders will use this information to determine how far your company is likely to go with the funds they’ll let you borrow.
In addition, you should also take the time to understand your lender’s requirements for non-disruptive financing. This could be in the form of security requirements or even the kinds of businesses they don’t finance. It’d be a waste of your time to approach an institution where your firm stands no chance of obtaining financial support.
- Not Seeking Expert Opinion
Sadly, many entrepreneurs tend to overestimate their abilities which often leads them into trouble. Applying for any funding needs the input of experienced professionals like attorneys and accountants.
Experienced attorneys help you to identify and understand different clauses in the contract documents that can lead you to losses. An example is redemption clauses.
Meanwhile, financial experts like an accountant look at your books and projections to provide you with a realistic amount to apply for as funding. This avoids a situation where you apply for either less or more than your business needs.
- Not Considering Different Options
While there are regulations for players in the financial sector, they’re still allowed some leeway to operate. For instance, although the interest that lenders charge on their various financing options is capped, they all don’t extend a similar interest rate. It’s good for you to scout the market to identify what different financial institutions offer. This can help you to avoid the common mistake of receiving high-interest non-dilutive funding, whereas there was an option of lower interest charges.
- Over-Valuing Your Business
It’s common for entrepreneurs to over-value their businesses, especially when seeking funds or partnerships. Unfortunately, this often sets you up for failure.
When you over-value your business, you raise your lender’s expectations, which can work against you when applying for additional funds in the future. Since you’ll always need to prove some growth to your lender when applying for future funds, this could end up hurting your relationship with your lender when they realize you were dishonest. You could end up missing necessary additional funding to scale up your business if you resort to this course of action.
- Over-Forecasting Your Financial Returns
When in desperate need of finances, it’s easy to overrate your business growth rate. This could result in you overestimating the money you’ll make to impress your potential financiers. The downside is that your lenders might be convinced that you can repay your non-dilutive funding over a shorter period than is realistically possible. And even if you could make high revenues, it’s always advisable to err on caution.
For instance, unforeseen changes in your business environment could make it impossible for you to earn the forecasted revenues causing you to default on repayments, potentially leading to poor relations between you and your lenders.
- Applying For Funding Too Early Or Too Late
Timing is critical when applying for funds because the processes can be long and winding. Doing it too early or too late can be disastrous. Poor timing can cost your business a great opportunity that would have elevated it to the next level.
According to a couple of entrepreneurs, it’s advisable to give yourself an average duration of six months to raise business funds. For instance, when you apply for funds too early, you expose your business to a lot of analysis that could cause your application to be rejected.
On the other hand, applying too late could see you miss a scheduled trade exhibition where you’d have demonstrated your products to prospective clients.
- Trying To Raise Money To Fix The Entire Business
The common saying that ‘Rome wasn’t built in a day’ comes into mind. It’s advisable to stick to your business strategy and plan even when raising funds for growth. Your business plan helps you to remain focused as it shows the most urgent business areas that need funding.
Whenever you’re applying for funds, deviating from the business plan can cause you to raise money that may not benefit the enterprise. This is especially critical in the in-between incidences where a lender proposes to give more than is asked. Entrepreneurs have been known to overspend when they get more money than they need. For example, this has resulted in business people incurring unnecessary expenses on office/warehouse space, salaries and wages, or new products that weren’t needed by the market.
- Pitching About Your Product Instead Of The Business
It’s normal to keep talking about some unique products your company is introducing and how they’ll solve many customer problems. When you use such details to pitch for non-dilutive funding, this becomes a problem. In as much as lenders aren’t after partnering with you in your business, they still want to understand your business model and how that’ll help you to make money.
Further, you must make your business presentation in a simple method that’s easy to understand. Your lender is keen to know how they’ll recover their money, so you must explain how your business as a whole (not specific products) will generate and rake in revenues.
Although non-dilutive funding is always a good option for startups, some options like bank loans are difficult to get. Plus, even where they’re readily available, young companies without the necessary collateral to secure their loans are always left out. Nonetheless, newer private lending and fintech companies have come onto the scene to address some of these challenges. You can reach out to any of them for non-disruptive funding for your company.