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Dilutive vs non-dilutive financing: What every agrifoodtech startup should know

April 5, 2022

This sponsored post has been published in partnership with CSC Leasing. Find out more here.

2021 was a big year for agrifoodtech, with investors offering up a record $51.7 billion in funding to the industry, according to AgFunder’s latest global Agrifoodtech Investment Report.

This potential is likely to remain hot in 2022. New and growing businesses will have plenty of options for capital.

As you weigh your options, consider the merits of dilutive versus 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

Also referred to as equity kickers, venture debt warrants 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 $1 million venture debt loan, and the lender wants 2% warrant coverage. They would be entitled to purchase $20,000 of your company’s stock. While it’s not a given that investors would purchase that much stock, they have the option – perhaps at a later date after the value of your shares has grown.

That could result in those investors owning a meaningful chunk of your 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 production, marketing, and sales strategies.

Covenants

To lower their risk, lenders will often put venture debt covenants in place that establish minimum financial and performance requirements for the business. For example, a covenant could require you to hit a specific revenue benchmark each month. If you don’t 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 shut down operations.

When you’re considering lenders, if any of them do require covenants, at least confirm they are willing to negotiate terms with you. Talk openly about the lender’s process should you fail to meet the term. Top lenders will be willing to work with you through challenges.

Financing without dilution

CSC Leasing offers founder- and investor-friendly non-dilutive funding for procuring mission-critical assets. Requiring no covenants or warrants, it’s a cleaner source of financing that is helping new agrifoodtech businesses take the next step in their growth.

Case in point: After graduating from a Silicon Valley-based accelerator, an autonomous farm startup was ready to launch its pilot program – a new type of vertical hydroponic farming that will help to combat climate change and food shortages.

The early-stage, seed-backed company planned to expand operations, but didn’t want to raise additional equity until it had proved out in the market. It needed an additional $250,000 in mission-critical equipment to scale – and conserving both equity and capital was a priority.

CSC Leasing provided the startup with non-dilutive funding in the form of an equipment lease, enabling it to set up its first facility and start onboarding customers and revenue sources – all within four months.

How equipment leasing can support your growing business

With an equipment lease line (as an example, CSC Leasing offers these in the range of $100,000 to $20 million) you can:

  • Preserve capital. Conserve equity capital 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 acquisitions and gain predictable monthly payments.
  • Expedite scale. Drive productivity, reach milestones sooner, and even incorporate ‘as-a-service’ revenue models into your business plan.

Securing non-dilutive financing can sometimes be a lengthy and complicated process, depending on the lender you work with.

But at CSC Leasing, all of our decisions are made in-house – reducing red tape and offering a much quicker overall turnaround. The entire process usually takes just weeks, instead of the months taken by many other lenders.

If you’d like to learn more about CSC’s flexible equipment financing options, contact regional director Jordan Stowe at jstowe@cscleasing.com

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