Debtor concentration: how your customer mix affects your facility

Debtor concentration is the single biggest variable in invoice finance pricing that most directors do not realise lenders look at. A clean ledger with twenty roughly equal customers will price very differently from a ledger of identical turnover where one customer represents 45% of the book. Same revenue, very different facility.

This is a practical guide to how lenders think about concentration, what it costs you in pricing and advance rate, and how to structure your business to live with it.

What debtor concentration means

Debtor concentration is the proportion of your sales ledger represented by your largest customers. Lenders look at it in two ways.

• Single-debtor concentration: the percentage of the ledger taken by your single biggest customer.
• Top-three concentration: the combined percentage of your top three customers.

A "well-diversified" ledger is one where no single customer is over 15% to 20% of total debtors and the top three together are under about 40%. Anything above those thresholds gets a concentration overlay.

Why lenders care

Invoice finance facilities are secured against your sales ledger. If your biggest customer fails, disputes a large invoice, or simply walks the contract, the lender's collateral disappears overnight. The more concentrated your ledger, the more exposed the lender is to that single event.

Lenders manage this exposure through three levers: concentration limits, advance-rate adjustments and credit-insurance overlays.

Concentration limits

A concentration limit caps the amount of any single debtor's balance that will be funded. The most common structure is a 25% cap, meaning if a debtor represents more than 25% of the ledger, only 25% of the total ledger value will be funded against that debtor's invoices. Anything above the cap sits in the unfunded balance.

Some specialist lenders will stretch this to 30%, 35% or even 50% if the debtor is investment-grade (think a FTSE 100 retailer, a Tier 1 main contractor, an NHS trust). Generalist lenders rarely go above 25%.

Advance-rate adjustments

Where concentration is unavoidable, lenders sometimes flex the advance rate down across the whole ledger to compensate for the risk. A book that would normally fund at 90% might fund at 85% if a single debtor is over 40%. On a £500k ledger, that is £25,000 of extra cash trapped in the unfunded balance at any given moment.

Credit-insurance overlays

For larger concentrated debtors, lenders will often arrange credit insurance through Atradius, Allianz Trade or Coface. If the debtor fails, the insurer pays out and the lender's exposure is covered. This typically lifts the concentration cap back towards 50% to 60% on the insured debtor, at the cost of an additional 0.05% to 0.15% on the service fee.

For a concentrated business with a single blue-chip debtor, credit insurance is almost always the right answer. The cost is tiny compared to the unfunded balance it releases.

A worked example

Take a logistics business turning over £6m a year. Their largest customer, a national retailer, accounts for 42% of the sales ledger. The next two customers are 18% and 12%. The remaining 28% is spread across forty smaller hauliers and brokers.

Without any concentration management, a generalist lender would apply a 25% cap on the retailer, leaving roughly £170k of the £1m average ledger value unfunded. That trapped cash is more than the directors' annual salaries.

With credit insurance arranged on the retailer (premium of around 0.1% on the insured turnover), the concentration cap lifts to 60%. The unfunded balance falls to around £40k. Net of insurance cost, the business unlocks roughly £125,000 of additional working capital with no extra borrowing.

How to think about your own ledger

Most directors instinctively know which customer is their biggest, but few know the exact ledger percentage at any given month-end. The numbers move with payment timing as well as sales mix, which is why lenders look at twelve-month rolling averages rather than spot readings.

Three practical steps for any business with concentration above 25%.

1. Pull a twelve-month aged debtor analysis and calculate the percentage of each top-five customer monthly. You will see the volatility.
2. Identify which large debtors are investment-grade. Those are candidates for credit-insurance overlays at renewal.
3. Build a deliberate diversification plan if any single customer trends above 35%. Even a small shift to 30% materially changes facility economics.

Sectors where concentration is normal

Some sectors are concentrated by their nature. Recruitment agencies often have one or two large end-clients accounting for 40% or more of placements. Construction sub-contractors usually work with a handful of Tier 1 main contractors. Wholesale distribution often involves a single supermarket buyer.

Specialist lenders in those sectors price for concentration as the norm, not the exception. The mistake is going to a generalist lender who treats your concentrated ledger as an exception and prices accordingly. Sector-specialist lenders are typically 30% to 50% cheaper for the same risk profile.

What to ask a lender about concentration

Three questions to ask any lender at quotation stage.

1. What is the concentration cap on my largest debtor?
2. Can credit insurance lift that cap, and at what cost?
3. Does the advance rate flex if my concentration changes during the facility year?

The answers tell you very quickly whether the lender is set up for your sector or is going to spend the year trying to make your business look like a different kind of business.

Concentration is a structuring problem, not a barrier

Debtor concentration above 30% will narrow the lender panel, but it rarely kills a deal. The right specialist lender, with the right credit-insurance overlay and the right structuring, can turn what looks like a concentrated mess into a clean, well-funded facility. Going to market through a broker who covers the specialists is the single biggest difference between a workable facility and a frustrating one.