When it comes to financing business assets, there are many options available, including invoice finance and leasing. Both of these financing options offer unique advantages and disadvantages, and it’s important to understand the differences between them to determine which option is the best fit for your business. In this blog, we will explore the differences between Invoice Finance and Leasing, and help you make an informed decision.
Invoice Finance:
Invoice finance is a type of financing that allows businesses to access the cash flow tied up in their unpaid invoices. This type of financing involves selling invoices to a lender, who will advance a percentage of the invoice value upfront, typically between 80-90%, and collect the outstanding balance from the customer. There are two main types of invoice finance: factoring and invoice discounting.
Factoring: Factoring is a type of invoice finance that involves selling your invoices to a factoring company, which will take care of your credit control and collections processes. This means that you won’t have to worry about chasing late payments or managing your customer’s creditworthiness.
Invoice Discounting: Invoice discounting is a type of invoice finance that allows businesses to retain control over their credit control and collections processes. This type of financing is typically more confidential than factoring, as customers are often unaware that the business is using an invoice finance provider.
Leasing:
Leasing is a type of financing that allows businesses to acquire the use of an asset, such as equipment or machinery, for a set period of time in exchange for regular payments. At the end of the lease term, the business can choose to renew the lease, return the asset, or purchase the asset outright. There are two main types of leases: finance leases and operating leases.
Finance Lease: Finance leases are similar to hire purchase agreements, where the business effectively buys the asset over the course of the lease term. At the end of the lease term, the business will typically have the option to purchase the asset outright.
Operating Lease: Operating leases are typically shorter in duration and allow businesses to use an asset without taking on ownership. At the end of the lease term, the business can either return the asset, extend the lease, or purchase the asset at a reduced price.
Differences:
One of the key differences between invoice finance and leasing is the asset involved. Invoice finance involves financing unpaid invoices, whereas leasing involves financing tangible assets such as equipment or machinery.
Another difference is the level of control and ownership. With invoice finance, the business retains ownership of its invoices and controls its credit control and collections processes. With leasing, the business may have the option to purchase the asset at the end of the lease term, but they don’t own it during the lease term.
Cost is also a key difference between invoice finance and leasing. With invoice finance, the cost is typically based on a discount charge, which is a percentage of the invoice value. The cost of leasing is typically based on the lease term, the asset being leased, and the business’s creditworthiness.
Which financing option is the best fit for your business?
The choice of financing option will depend on your business’s individual needs and circumstances. If your business needs to free up cash flow quickly by accessing unpaid invoices, invoice finance may be the best option for you. If your business needs access to equipment or machinery without committing to a large upfront cost, leasing may be the best option for you.
In conclusion, invoice finance and leasing are two distinct financing options, each with its own advantages and disadvantages. It’s important to carefully consider the differences between the two and determine which option is the best fit for your business. With the right financing option, you can free up cash flow, acquire the assets you need to grow your business and achieve long-term success.
Get in touch with us at Funding Bay for your invoice financing needs.
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