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Navigating the Capital Maze: Balancing Dilutive and Non-Dilutive Funding for Startups

Updated: Nov 15, 2024

The Dilemma of Dilutive vs. Non-Dilutive Capital for Startups


New age enterprises or startups often face the challenge of finding the right mix between dilutive and non-dilutive forms of capital. Non-dilutive capital refers to any capital a startup raises that does not require dilution of equity or ownership. This dilemma is exacerbated by the unavailability of quality advice on such matters.



Dilutive Capital Raise

  • Equity

  • Venture Debt (in the form of warrants)

  • Convertible Instruments

  • Mezzanine Financing (may have participation rights in the equity of the company)


Non-Dilutive Capital Raise

  • Bank/NBFC Debt (working capital loans, supply chain financing, term loans, etc.)

  • Revenue-Based Financing

  • Export/Receivables Factoring

  • Asset Leasing


Raising capital in an optimal structure can create substantial upside for founders and early backers. Over a period of 3-5 years, incremental dilution can be reduced with every follow-on equity round. The goal is to utilize more non-dilutive capital to achieve business goals.


Leasing and Factoring: Key Non-Dilutive Options


Leasing:   A startup with consistent support from its equity backers can opt for leasing its IT assets and other office infrastructure. Additionally, any investment in plant and machinery can also be funded via long-term leases of 3 to 5 years. This approach defers the immediate blockage of expensive equity proceeds to meet lump sum investment requirements. Leasing makes the overall business asset-light and enables expenditure to be booked on lease payments.


Factoring:   For any new age enterprise providing goods and services to large e-commerce companies, reputed conglomerates, export houses, and large international clients, factoring helps to de-leverage the balance sheet and improve cash flows. Startups can avail domestic and export factoring from several factors.


Factoring can also help improve ratios used to evaluate the credit risk associated with any direct exposures. Factored receivables will appear as a contingent liability if the structure is with recourse; otherwise, receivables simply get replaced by cash on the balance sheet. Factoring increases the available unencumbered cash and thus also helps in runway extension efforts.

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