Factoring
Factoring is where the financial institution (factor) advances the entrepreneur money against proceeds from the entrepreneur's outstanding accounts receivables. Factoring firms generally are paid a percentage of the invoice's value.
Upside
- Provides funds quickly, when they might not otherwise be available.
- Helps companies with an unsteady and unbalanced cash flow.
Downside
- Factoring requires increased accounting oversight and administration.
- A substantial "cost of money" is involved in factoring. A hefty portion of your receivables will go the way of the factoring firm.
- Your customers are actually paying a factoring company rather than you.
Venture Capitalists
Venture capitalists are individuals or companies with large amounts of capital to invest and expect higher returns.
Use Venture Capitalists if you already have a great track record in your field or as an entrepreneur, and if you have a business concept that will require a lot of money ($250K to $10s of millions) and will have a rapid growth curve.
Upside
- VCs invest smarts and networking, in addition to money.
- VCs typically have more money available if you need it to grow down the road.
Downside
- VCs typically only invest in established companies.
- You must be willing to give up significant control over major decisions for your company.
- You must have a "fast growth" company.
- You must have an aggressive exit strategy to sell your business or do an IPO within 5-7 years.