Invoice finance and asset finance are both products that allow companies to support cash flow, expand operations, or purchase essential equipment.
They are fundamentally different, and that’s what we are going to discuss in this article.
These two business finance solutions have varying structures and are suitable for distinct commercial needs. By reading this article, you’ll gain an understanding of how each type of finance works, its key features, and how they differ, helping you to choose the most suitable option.
What is invoice finance?
With invoice finance, businesses can access cash tied up in their sales ledger, also known as accounts receivable.
It is a product which cuts out the wait – of weeks or possibly months – for customers to pay their invoices. With invoice finance, the lender advances a percentage of the invoice value upfront, unlocking immediate working capital. For this reason, invoice finance can be beneficial for companies experiencing under cash-flow pressure caused by slow-paying customers or long payment terms.
How does invoice finance work?
Invoice finance works by using your company’s outstanding invoices as the principal asset. Once your business issues an invoice to a customer, it can submit that invoice to the finance provider. Usually, a share of between 70-95% of the invoice value will be advanced by the lender. When the customer pays the invoice, the remaining balance will be released, minus the lender’s fees.
So to recap, the main asset used in invoice finance is the sales ledger or accounts payable. This serves as not only the basis for the funding amount but also the primary security for the lender.
Invoice finance can vary. Sometimes the business may retain responsibility for collecting customer payments, and under other agreements, the lender will manage the collections process. In both cases, invoice finance provides rapid access to cash that would otherwise remain out of reach until the customer settles their invoice.
What is asset finance?
Asset finance is a broader category of funding than invoice finance. It gives businesses the opportunity to obtain or refinance physical and financial assets.
Rather than relying on unpaid invoices, asset finance uses items such as equipment, machinery, vehicles, inventory, property, or other assets of value to secure funding. You’ll find asset finance agreements commonly used to spread the cost of a business’s major purchases or leverage their existing assets to free up working capital.
How does asset finance work?
Asset finance works by using an asset – either an existing item or one yet to be purchased – as collateral. If a business is acquiring new equipment, the lender usually purchases the asset and allows the business to use it in exchange for fixed monthly payments. This is known as a hire purchase or leasing arrangement.
If a business already owns valuable assets, it can unlock capital through asset refinancing. This involves the lender using the asset as security and providing a loan secured against its value.
Invoice finance vs asset finance
Now we’ve covered the basics, it’s time to take an overview of what invoice finance and asset finance can offer.
In general, invoice finance is a way for a company to improve its cash flow, while asset finance is used to support investment.
The key difference between the two products can be seen in the type of asset used to secure funding. Invoice finance relies solely on the company’s sales ledger, whereas asset finance involves physical or financial assets of value. This leads to the difference in security offered – invoice finance is secured against expected customer payments, while asset finance is secured against items the lender can recover.
In terms of funding structure, invoice finance typically provides a credit facility with funding amounts that may fluctuate in line with the value of outstanding invoices. Asset finance, on the other hand, typically offers a fixed-term arrangement and repayment schedule.
We can conclude that invoice finance is the most flexible of the two products, as funding can grow with sales. The more your business invoices, the more finance will be available to it.
Which product gives more control to a company is debatable. You should note that some invoice finance arrangements involve the lender taking over the management of customer collections. In asset finance, a business will retain operational control of an asset, so long as the payment schedule is adhered to.
When choosing between the two products, think carefully about your company’s short- and long-term needs, as well as which assets are most advantageous to leverage.
