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Merits

i. Obtaining funds through factoring is cheaper than financing through
other means such as bank credit;
ii. With cash flow accelerated by factoring, the client is able to meet
his/her liabilities promptly as and when these arise;
iii. Factoring as a source of funds is flexible and ensures a definite pattern of
cash inflows from credit sales. It provides security for a debt that a firm
might otherwise be unable to obtain;
iv. It does not create any charge on the assets of the firm;
v. The client can concentrate on other functional areas of business as the
responsibility of credit control is shouldered by the factor.

Limitations

a. This source is expensive when the invoices are numerous and smaller in
amount;
b. The advance finance provided by the factor firm is generally available at a
higher interest cost than the usual rate of interest;
c. The factor is a third party to the customer who may not feel comfortable
while dealing with it.

Lease Financing

a. A lease is a contractual agreement whereby one party i.e., the owner of an
asset grants the other party the right to use the asset in return for a
periodic payment.
b. In other words it is a renting of an asset for some specified period. The
owner of the assets is called the ‘lessor’ while the party that uses the assets
is known as the ‘lessee’.
c. The lessee pays a fixed periodic amount called lease rental to the lessor for
the use of the asset. The terms and conditions regulating the lease
arrangements are given in the lease contract.
d. At the end of the lease period, the asset goes back to the lessor. Lease
finance provides an important means of modernization and diversification
to the firm.
e. Such type of financing is more prevalent in the acquisition of such assets
as computers and electronic equipment which become obsolete quicker
because of the fast changing technological developments.
f. While making the leasing decision, the cost of leasing an asset must be
compared with the cost of owning the same.

Merits

a. It enables the lessee to acquire the asset with a lower investment;
b. Simple documentation makes it easier to finance assets;