What Is Factoring? A Complete Guide for Business Owners

What is factoring, and why are more and more Polish businesses treating it as a key tool for managing cash flow? It's a question many business owners ask themselves when they issue invoices with deferred payment terms and wait months for a transfer. In this guide we'll explain everything you need to know: from the definition, through the types, to concrete numbers and examples.

Defining factoring: what exactly is it?

Factoring is a financial service in which a specialized company (the factor) buys unpaid invoices from the business that issued them (the client). In practice, this means a business that issued an invoice with, say, a 60-day payment term doesn't have to wait two months: the factor pays out 80–95% of the gross invoice value right away. The remaining amount (minus a fee) goes to the client once the customer actually settles the invoice.

Key terms in factoring:

• Client (seller): the business selling goods or services and issuing invoices with deferred payment terms
• Factor: the factoring company or bank that buys the receivables and finances the client
• Customer (debtor): the buyer of the goods or service, obligated to pay the invoice
• Receivable: the client's right to receive payment from the customer
• Assignment of receivables: the legal mechanism that transfers the right to the receivable from the client to the factor

How does factoring work step by step?

The factoring process is simple and usually fully digital. Here's what it looks like in practice:

1. Sign a factoring agreement: the business signs a framework agreement with the factor, setting financing limits, fees, and terms of cooperation. Verification usually takes 1–5 business days.
2. Issue an invoice to the customer: the client issues the invoice as usual. The only difference: the invoice, or a separate notice, informs the customer that the receivable has been transferred to the factor and payment should go to the factor's account (in the case of disclosed factoring).
3. Submit the invoice to the factor: the client submits the invoice through an online system, an app, or email. The factor verifies the document and the customer's reliability.
4. Advance payment: the factor transfers 80–95% of the gross invoice value, usually within 24–48 hours of submission.
5. Collection: the factor waits for payment from the customer. With full factoring, if the customer doesn't pay, the factor bears the risk. With recourse factoring, the client does.
6. Final settlement: once payment is received, the factor transfers the remaining amount to the client, minus the fee and any financing interest.

Types of factoring: which one to choose?

Several main variants of factoring are available on the Polish market, differing mainly in who bears the risk of the customer's insolvency and whether the customer knows about the assignment.

Full factoring (non-recourse)

The factor takes on the credit risk, meaning the risk that the customer won't pay. If the debtor goes bankrupt or simply refuses to pay, the client doesn't lose the advance already paid out. This is the most expensive type of factoring, but it gives the business full security and the ability to remove the receivable from its balance sheet. Excellent for businesses that sell to many different customers and want to protect themselves against losses from uncollectible receivables.

Recourse factoring

The risk stays with the client. If the customer doesn't pay within the agreed term (usually 30–60 days past the invoice due date), the client must return the advance paid out by the factor. In exchange, recourse factoring is cheaper: the fee can be up to 30–50% lower than with full factoring. A good choice when you know your customers and know they're financially reliable.

Disclosed vs. undisclosed factoring

The split between disclosed and undisclosed factoring depends on whether the customer knows about the assignment of receivables. With disclosed (open) factoring, they know and pay directly into the factor's account. With undisclosed (silent) factoring, they don't know, and pay into the client's account, who then passes the funds to the factor. Undisclosed factoring is more expensive and carries higher risk for the factor.

Reverse (purchase) factoring

Here the initiative lies with the buyer, not the seller. A business (e.g. a retail chain) signs an agreement with a factor, who pays its suppliers earlier than the invoice term would allow. The supplier gets paid faster, and the buyer can extend its own payment term. We cover this in detail in our article on reverse factoring.

Who does factoring make sense for? Industries and use cases

What is factoring in practice? It's best seen through the lens of specific industries and situations where it works best. Factoring is used primarily by B2B businesses that sell on deferred payment terms and need a steady flow of cash.

Industries where factoring is especially popular:

• Transport and logistics: long payment terms from clients (60–90 days), against fixed fuel, leasing and driver costs
• Construction and interior finishing: large invoices, long terms, often multi-stage settlements
• Wholesale trade: large turnover, thin margins, sensitivity to payment delays
• IT services and outsourcing: monthly subscription invoices, 30–60 day terms
• Manufacturing: the need for raw materials before payment is received for finished products
• Agriculture and agribusiness: seasonality, long terms on procurement

Factoring works especially well when:

• The business is growing fast and needs cash to finance that growth
• Customers force long payment terms (30, 60, 90 days)
• The business wants to avoid taking on debt through a working capital loan
• The credit history is too short or insufficient for a bank
• The owner doesn't want to put personal assets up as collateral

Factoring vs. a working capital loan: a comparison

Many businesses face a choice: factoring or a working capital loan? Both tools finance day-to-day operations, but they differ fundamentally in mechanism, availability, and impact on the balance sheet.

Key differences:

• Collateral: A working capital loan requires collateral (real estate, a guarantee, a pledge). Factoring doesn't. The receivables themselves are factoring's collateral.
• Balance sheet impact: A working capital loan is a liability that increases the business's debt. Factoring (especially full factoring) can reduce receivables and doesn't increase debt.
• Availability: A loan requires credit history, creditworthiness, and often years in business. Factoring is available from the first month of operation, as long as the business has customers.
• Flexibility: The factoring limit grows with the business's turnover: the more invoices, the more financing available. A loan has a fixed limit.
• Cost: Comparable, though full factoring can be slightly more expensive than a loan with a similar interest rate.

How much does factoring cost: indicative rates

The cost of factoring is made up of several components. Understanding the cost structure lets you compare offers and negotiate better terms.

• Factoring fee: 0.2–2.5% of the gross invoice value per invoice. Depends on the type of factoring, invoice value, industry, and customer reliability.
• Financing interest: Charged for the actual financing period, similar to loan interest. WIBOR plus a margin (approx. 3–6% a year).
• Administrative fee: A fixed monthly fee for servicing the agreement, from zero to a few hundred zloty a month.
• Customer verification fee: One-time or periodic, depending on the factor.

Frequently asked questions

Learn more

• → Disclosed vs. undisclosed factoring: differences, costs, when to choose which?
• → How much does factoring cost? Fees and hidden costs in 2026
• → Factoring for sole proprietorships: can a one-person business use it?
• → Check out our factoring offer