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.
- Provides funds quickly, when they might not otherwise be available.
- Helps companies with an unsteady and unbalanced cash flow.
- 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 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.
- VCs invest smarts and networking, in addition to money.
- VCs typically have more money available if you need it to grow down the road.
- 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.