Selecting the right type of business financing can be very difficult for entrepreneurs – you get to live with the consequences of your decision for a very long time. Many times, entrepreneurs will select an option that solves their problem, even though that option may not offer the best solution for their particular problem. Case in point, we see a lot of companies that try to get invoice financing because they were unable to get venture capital or a private financing solution.
Two different problems – Two different solutions
Both of these funding solutions solve two very distinct problems. Venture capital works well for companies that need funds to start up, develop products and/or position themselves for explosive growth. Factoring, on the other hand, helps companies that have cash flow problems because their customer demand credit terms, and pay their invoices in 30 to 60 days. Sure, you can solve cash flow problems using venture capital, but you will have to give up equity. VC is really not the best solution for that problem.
The cost of giving up equity
Selling equity can be a tricky business. You need to determine the value of the equity you are selling, and you need to convince the venture capitalist or private investor to buy it. And while you will give up equity, you will gain a new partner and co-owner. That may be good, if you are working with the right VC in the right circumstance. Or wrong, if you are not. Ultimately, you end up giving up independence along with your equity.
However, if your company has cash flow problems due to slow paying clients, you don’t need to give up equity or independence You can finance your invoices and grow your company organically.
Factoring and organic growth
Whereas venture capital can be used to solve a number of financial problems – factoring financing solves one problem only. It helps fix cash flow problems created due to clients that are paying in 30 to 60 days. It works by financing your invoices, using a intermediary to handle the transaction. They provide the funds, as soon as you invoice your client and hold the receivable as collateral. The transaction closes as soon as your customer pays their invoice in full. You can use the program as often as you need, ensuring constant access to working capital.
One advantage of receivables financing is that it’s easier to get than conventional financing – and venture capital. It can be used to finance new companies or growing companies alike. The most important requirement is that your invoices must be creditworthy and payable by clients that have a solid payment history. Additionally, your invoices must not be encumbered by liens.
The biggest benefit of this solution is that it can be used to finance organic growth. By accelerating your cash flow, you can take on new clients and offer credit terms with confidence.
Most receivables financing lines can be deployed very quickly – often in as little as 5 days. Because of this, the line can be used in situations where there is an urgent cash flow shortage and funding is needed quickly.
Your best bet will always be to look for the financial product that solves your specific problem in the best possible way. If your company has a working capital shortage because you can’t afford to offer payment terms to clients – your should consider financing your invoices.
Note: for more about venture capital, you should consider visiting Fred Wilsons AVC blog.