Non-Dilutive Funding for Startups: Guide for UK Founders
Seeking funding without losing equity? Our non-dilutive funding guide for startups shows you how to secure capital and maintain ownership.
You've nurtured your startup from a bright idea to a potential market disruptor. The next step? Securing the money needed to catapult your business to the next level.
There are many paths to startup funding, but traditional routes like venture capital and angel investment require surrendering a precious piece of your company. But what if there was an alternative?
What if you could inject essential funds into your business while keeping the reins firmly in your hands?
This is where non-dilutive funding comes in.
Non-dilutive or non-equity finance gives you vital working capital without parting with any stake in your business. Unlike in the Dragons’ Den or venture capital, where entrepreneurs offer investors a percentage of their business for a specific amount of cash, non-dilutive finance gives you the funds you need to grow while keeping 100% ownership.
The key difference between the two is that dilutive funding trades ownership for capital, whereas non-dilutive funding provides capital without giving up ownership. With dilutive funding, investors receive equity, which reduces founders’ ownership but can often add strategic guidance. Many non-dilutive routes, such as grant programmes and loans, also come with startup mentoring and support networks; however, without the need to give up control.
Non-dilutive funding always involves gaining capital without losing equity, but each type has its own eligibility criteria and process for securing the cash. Some of the most popular types of non-dilutive funding include government grants, loans, and tax credits.
Certain non-equity routes might be perfect for one business type, product concept or development stage but wholly unsuitable for another.
Let’s look at five common types of non-equity funding and the businesses they suit.
Bootstrapping refers to when, as a business owner, you use your own resources and the revenue your business generates to fund growth without external investment. Some of the biggest companies in the world started bootstrapped, even Microsoft, for example! Grantify was also once used bootstrapping as a starting point and has come a long way in a short time, winning multiple grants and ranking among the Sunday Times 100 Fastest-Growing Private Companies.
Bootstrapping your business can be a good idea if you…
- want to retain full control and autonomy
- can manage a lean and efficient business model, as spending is limited to what you can afford
- are happy to focus on customer-driven growth, as the need for revenue is immediate
- want to avoid the pressure and time involved in securing external funding, allowing for a quicker start and focus on the product or service
- would like a badge of credibility, showing potential customers and partners that you’re fully committed to and confident in the business
However, if you’re working on a high-risk idea or need more money than you currently or will imminently have, seeking external finance might give you a smoother ride.
Loans involve borrowing money from a bank or financial institution that must be repaid with interest, without giving up any equity. Interest can be fixed or based on your turnover (called revenue-based financing).
A business loan could be a smart funding choice if you…
- have a proven revenue model and a clear plan for growth (so you can safely repay the loan plus interest)
- have significant upfront costs like equipment, premises, or inventory
- will benefit from building up your creditworthiness
One option is a Start Up Loan from the British Business Bank. If you’ve traded for less than three years and meet other criteria, you could receive a loan for up to £25,000 (although the average is typically under £10,000).
You retain full ownership and control of your business and can use the funds to pay for equipment and stock, rent, marketing, and more.
Of course, like any other loan, the money must be repaid. For a £25,000 loan repaid over the maximum term of five years, you’d pay a total of £3,999.20 in interest at £483.32 per month.1
Another popular loan option for startups is Innovate UK’s innovation loans. Unlike traditional bank loans, these loans are especially designed for small businesses to access larger sums to fund late-stage R&D on favourable terms and competitive interest rates. Innovation Loans relieve borrowers of the initial upfront financial pressures by enabling you to pay half the interest while you’re still in R&D stages. You only start paying full interest and the principal of the loan once you start selling.
A business loan might not be viable in uncertain or variable markets when you’re still refining your business model or if your revenue streams are unproven or irregular. In such cases, regular repayments could become another thing to fret about.
You might instead benefit from funding that requires no loss of ownership and no debt.
Loan repayments can drain funds needed for R&D, and securing pre-revenue financing is often challenging.
In contrast, grants offer transformative funding, providing the resources and speed to market that bootstrapping and loans may struggle to achieve.”
You raise small amounts of money from many people, typically through online platforms. Common platforms include Kickstarter and Indiegogo.
Crowdfunding can work wonders if you…
- have a unique, consumer-focused, market-ready product or idea
- can tell a compelling story that resonates with a broad audience
- want to build a community of supporters and early adopters
- need to validate market appeal before full-scale production
Crowdfunding can be a more uncertain path than a business loan, for which you’re approved or denied. You may not reach your goal, and even if you do, it could take a significant, sophisticated marketing effort to convert enough general interest into a financial pledge.
If your product or service isn’t easily understood and visualised by the public, there might still be non-dilutive means to fund it without taking on debt.
One option is R&D Tax Credits – a way to recoup some of the costs associated with innovative projects, effectively reducing the overall financial burden of research and development.
You receive incentives from the government to encourage certain business activities, like research and development. The UK's R&D tax credit scheme allows companies to reduce their tax bill or receive a tax refund.
R&D Tax Credits can be highly beneficial for your business if you…
- engage in qualifying research and development activities within the UK
- incur significant costs in developing new processes, products, or services
- aim to resolve scientific or technological uncertainties
- are a small or medium-sized enterprise (SME) or even a larger company facing R&D challenges
- seek financial relief to reinvest in your innovation journey and grow your business
Reducing your business’s tax liability or a cash refund could be instrumental in fueling growth, but R&D Tax Credits are only a viable option for businesses that already have money to spend.
We partnered with tax experts Bonham & Brook to help small businesses maximise financial incentives, reduce costs, and use these savings to reinvest in innovation. If you want to learn more about claiming back on research and development costs from the UK government, speak to the experts at Bonham & Brook.
For innovative companies engaged in expensive R&D without a cash runway, another non-dilutive option worth considering is competitive business grants.
Startup grants are another kind of non-dilutive funding available to you. Government bodies or private organisations award you funds for specific projects or purposes. No repayment is required. Examples include Innovate UK, Smart Scotland, and EIC Accelerator grants. Eligibility criteria and requirements will vary depending on the grant you’re applying for, such as the development stage you’re at, your industry, and other particulars. The application process for many grants can also be complex and competitive, so it’s recommended that you speak to a grant consultant to maximise your chances of securing funding.
A business grant can be an excellent strategy for…
- innovative, cutting-edge projects with potential for commercialisation and significant economic return
- accessing financial support at critical development stages, allowing you to focus on bringing disruptive ideas to market
- sectors like technology, science, or environmental innovation, where initial research and development costs can be prohibitive.
- earning credibility and validation that enhance the business’s appeal to future investors or partners
This process isn't just about winning grants; it's about getting investment-ready. The same compelling narrative you craft for funders resonates powerfully with equity investors.”
If you’re an innovative company trying to test an idea, bring a new product to market, or collaborate with other businesses or research organisations, grants could be the best funding for you.
Once a more established product has been developed with grant funding, equity investment and business loans may become easier to access.”
The government offers R&D grants through UK Research and Innovation (UKRI). Within UKRI, Innovate UK – the country’s innovation agency – has up to £25 million on offer for game-changing and commercially viable R&D innovations that can significantly impact the UK economy.
You can apply for a grant of £200K-£2M (we recommend applying for a max £500K project).
With business grants you…
- retain full ownership and control
- don’t have to pay any of the money back
- can also use R&D Tax Credits to lower your costs
Sounds pretty dreamy. So what’s the catch?
Well, business grants are essentially competitions. First, you have to be eligible to enter (and many businesses only discover they aren’t suitable after slaving over their application for many hours).
If you are eligible, your project submission needs to score over 80% across a wide range of assessment criteria to succeed. And the boxes assessors need to tick are constantly changing.
Where can small businesses find non-dilutive funding opportunities?
If you have a game-changing and commercially viable innovation that can significantly impact the UK economy, check if you’re eligible for grant funding immediately. Speak to our experts to learn more about the various opportunities your business could secure to fuel your R&D. A grant could be what your business needs to catapult it to the next level.
Navigating the world of non-dilutive funding is about strategically aligning financial support with each phase of your business's growth.
Bootstrapping might help get your innovative concept off the ground, allowing you to refine your ideas with personal resources.
As your project becomes more defined and enters the research and development stage, R&D Tax Credits can be crucial, helping to mitigate some of the early development costs.
Once your innovation shows potential for significant market impact, securing an Innovate UK Smart Grant could provide the substantial backing needed for development and scaling up your technology.
Perhaps further down the line, a business loan could come into play for aspects like market expansion, branding, or establishing a robust sales infrastructure – areas typically not covered by an innovation business grant.
See which grants you qualify for or how we’ve helped thousands of business owners get the financial backing they need.
- Based on https://www.startuploans.co.uk/loan-repayment-calculator/ accessed 29/01/2024
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