Dilutive Vs. Non-Dilutive Financing
Dilutive Vs. Non-Dilutive Financing, What’s the difference and why should you care?
When you’ve built your business from the ground up, it can be hard to relinquish control to someone else. It can be especially heart-wrenching to hand over ownership of the business you’ve put blood, sweat and tears into. Unfortunately, it’s a harsh reality many business owners have to accept when they need an injection of cash to drive growth or keep the business going during challenging times.
Investors want to see returns on their investments, and that often means they want to have a say in how you run the business. If they aren’t on the same page as you, it can create a conflict and obstacles that make it hard for you to grow your business the way you see fit.
How do you know if you will lose equity?
Most investors are going to be upfront about it. Some may not be, however, so it’s always good to know what to look for. Specifically, as you research options, you want “non-dilutive financing.” Dilutive financing requires you to part with at least some ownership, for example by selling shares. With non-dilutive financing, you will receive the cash—and retain complete ownership of your business. A typical bank loan is an example of non-dilutive financing. You will pay interest, but you don’t lose any ownership.
Dilutive financing could have strings attached including:
Warrants. Venture debt warrants, also referred to as equity kickers, are often a loan condition in a venture debt agreement. Essentially, warrants enable lenders to buy stock in your business for a fixed price up until an expiration date. Think of it as an incentive for investing in your business. For example, let’s say you receive a $1MM venture debt loan, and the lender wants 20% warrant coverage. They would be entitled to purchased $200K of your company’s stock. While it’s not a given investors would purchase that much stock, they have the option, perhaps at a later date after the value of your shares has grown for a much lower price. That could result in those investors owning a significant chunk of the business. If you have multiple investors, you could quickly lose the majority of your shares, and ultimately, you could lose control over business decisions. However, even if the warrant coverage is lower, investors may decide they want to see a quicker return on their investment and expect to have a say in everything from production to marketing and sales strategies.
Covenants. To lower their risk, lenders will often put into place venture debt covenants, that establish minimum financial and performance requirements for the business. For example, a covenant could require you hit a specific revenue benchmark each month. If you fail to meet those requirements, the lender can take action, ranging from increasing interest rates to demanding all debt be paid in full. Depending on the scope of agreement and size of the loan, a covenant could force a business to close its doors or shut down operations. When you’re considering lenders, opt for ones that don’t require covenants, but at the very least, find ones that are willing to negotiate those terms with you. Talk openly about the lender’s process should you fail to meet the term. Lenders should be willing to work with you through challenges.
CSC Leasing offers founder- and investor-friendly non-dilutive funding that doesn’t come with covenants or warrants, so it’s a cleaner source of financing. With lease lines ranging from $100K to $20MM, you can:
Preserve capital. Conserve equity for growth, product development, key hires and other high ROI activities—instead of wasting it on depreciating assets.
Increase cash flow. Spread out the costs of equipment acquisition and gain predictable monthly payments.
Expedite scale. Drive productivity and reach milestones sooner by spreading out the cost of expensive equipment and technology.
Plus, CSC Leasing is much easier to work with than other lenders who offer non-dilutive financing. All our decisions are made in-house, so there’s less red tape and quicker decision-making. In fact, the entire process usually takes just weeks, instead of months like other lenders, because our lending experience is so seamless.
If you’d like to learn more about our equipment financing options, contact us today at (804) 673-1000.
About CSC Leasing Company
CSC Leasing Company maintains a successful 35-year track record working with organizations of all
sizes and stages, providing a low-cost, non-dilutive form of capital for procuring equipment. With nearly $1 billion in transactions financed, CSC Leasing offers an agile and flexible approach with the transparency, speed and service of a family-owned business. Learn more at www.cscleasing.com.