Factoring is a powerful way for many companies to accelerate their cash flow. But behind every financed invoice lies a crucial question: will this invoice actually be paid? That is precisely what factorability is all about. It is one of the most important assessment criteria for factoring companies and largely determines how much financing is possible and under what conditions.

In this blog, you will discover what factorability means exactly, how it is assessed, and why it makes the difference between traditional and American-style factoring.

What is factorability?

Factoring refers to the degree of certainty that an invoice will be paid, even if the supplier, also known as the factoring client, goes bankrupt. In other words: how likely is it that the debtor will continue to pay their debt, even if the supplier is no longer in business?

What determines good or bad factorability?

High and good factorability is found in companies that supply standard, non-perishable goods or services based on a clear, approved quotation – i.e., not within complex contracts with bonuses, guarantees, or other conditions. It is important that signed delivery notes, timesheets, or CMRs are available on a structural basis. These documents form tangible proof that the service has actually been provided and the invoice is unlikely to be disputed.

A low and poor factorability, on the other hand, is found in companies where the value provided only becomes visible at the end of a process. A classic example is a software developer who is allowed to invoice in installments but whose end product is only usable after the final delivery. If such a supplier goes bankrupt before the software is working, the customer has no use for the partial services and therefore feels no need to pay the intermediate invoices.

Factorability varies by sector and by company

Every activity has its own factorability profile. Even between two companies in the same sector, there may be a difference depending on how their order-to-cash process, also known as the process from quotation to payment, is organized.

The different types of factoring and the influence of factorability

Factorability in traditional factoring

For traditional factoring companies, factorability is the ‘holy grail’. A file is only accepted if the factorability is sufficiently high. These companies do not analyse every individual invoice or contract with debtors; they trust that good factorability means that most invoices will ultimately be paid.

Because they do not know every detail of the underlying contracts, they take a safety margin: they usually finance 75 to 85% of the invoice amount. This leaves room to absorb any unpaid invoices (or bonuses and credit notes) without ultimately making a loss.

In addition, they impose concentration standards: no single customer may account for more than (usually) 20% of the total outstanding balance. This prevents a single unpaid invoice from causing them a loss.

American-style factoring: different focus, different approach

In American-style factoring, factorability plays a much smaller role. Here, the emphasis is on the solvency of the debtor and on their explicit approval of the invoice and confirmation that it will be paid on the due date to the factoring company's account.

Because the risk of non-payment in the event of the supplier's bankruptcy largely disappears, these companies can finance up to 90 to 100% of the invoice. Even concentration on a single customer is not a problem; even a single debtor can be sufficient.

However, American-style factoring requires more intensive monitoring by the factoring company, which generally makes this form a bit pricier. On the other hand, many more sectors can now make use of factoring, including the construction sector, where factoring used to be difficult to apply.

In summary

Factorability largely determines whether and how a factoring company is prepared to finance invoices.

• Traditional factoring relies on high factorability and mitigates risk through diversification by imposing concentration limits and reducing funding levels.
• American-style factoring is based on the soundness of each individual transaction, allowing for higher financing and more sectors.

Thanks to this evolution, factoring is no longer limited to companies with easily deliverable products but is also available to complex or project-based sectors.

Factoring is not a theoretical concept, but a decisive factor in how much working capital you can free up today. The difference often lies not in your sector, but in how your contracts, deliveries, and invoicing are structured.

Are you unsure whether your invoices are eligible for factoring? Or would you like to know whether there is more financing available than you currently think? Then be sure to contact us for an initial consultation.