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Factoring

What is factoring?

Factoring is a form of short-term financing. It works by selling accounts receivable—created from services rendered or goods delivered—to a third party (the factor), typically a bank or a factoring company. These receivables usually have payment terms ranging from 30 to 120 days, or in some cases up to 180 days.

Factoring can be a suitable alternative to traditional loans, as selling your receivables gives you access to the funds you need immediately.

Factoring is most commonly used by larger companies, as historically only banks offered factoring, and small and medium-sized enterprises (SMEs) weren’t their focus. However, company size is no longer a major limitation today.

When receivables are sold, the factor provides financing up to the agreed percentage, defined in the contract. This is usually up to 90% of the invoice value. You won’t receive the full amount upfront, but you’ll get most of it right away.

How does factoring work?

  1. The factor checks the recipient listed on the invoice and the factoring applicant.
  2. The applicant and the factor sign a contract.
  3. The factor transfers the agreed portion of the funds to the applicant’s account.
  4. After the customer pays the invoice to the factor, the remaining amount is released to you.
  5. The factoring company continues managing the receivables, ensuring timely collection and sending payment reminders if necessary.

What are the benefits of factoring?

  • Improved cash flow without taking out a loan
  • No need to wait for payment from customers
  • No need to handle debt collection
  • Simplified invoice administration
  • Enables business growth without incurring debt

Types of factoring

  • Non-recourse factoring – the risk of non-payment is transferred to the factor (bank or factoring company).
  • Recourse factoring – factoring without insurance; the risk stays with the client. If the invoice isn’t paid by the due date, it returns to the client.
  • Export factoring – applies to receivables issued to foreign buyers. In Poland, it’s mostly used for EU-based trade.
  • Import factoring – designed for buyers who want to defer payment for invoices from foreign suppliers.

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