How Customer Concentration Changes a Financing Conversation

Winning a major account can change a company's growth prospects. It can also make cash flow more dependent on one customer's payment decisions. When seeking financing, management should explain both sides of that relationship.

Trade credit insurer Allianz Trade identifies concentration in a small number of customers as a source of receivables and cash flow risk. Customer concentration can also be part of an ABL lender's review. There is no universal acceptable percentage.

Measure concentration in more than one way

Prepare a list of your largest customers by revenue and by outstanding receivables at the same reporting date. Include the related payment history and current disputes. A customer that pays slowly can represent a greater share of receivables than of annual sales.

For planning purposes, also identify related customer entities. Ask the prospective lender how it groups them. Several account names do not necessarily represent independent sources of repayment.

Explain the relationship with evidence

Put together the contract, purchasing history, invoice approvals and recent collection record for the largest account. Explain whether orders are recurring, cancellable or dependent on a specific project.

Avoid describing a familiar brand as automatically safe. The financing discussion should address the particular customer entity, its obligation to pay and the documents supporting your invoices. If the customer can deduct returns or other adjustments, show how those deductions are tracked.

Run a delayed payment scenario

Assume a hypothetical company has $1 million of receivables, with $450,000 due from one customer. Management expects that customer to pay next month. If payment moves back by 30 days, the company must reconsider the cash available for payroll and suppliers during that interval.

Build the scenario using actual scheduled payments. The result may justify a collection discussion, a revised purchasing plan or a larger cash reserve. It does not automatically mean the entire $450,000 can be financed.

Ask the lender to calculate availability under both the normal and delayed collection scenarios. Have it explain any treatment of concentration in the proposed facility.

Make growth less dependent on a single assumption

Assign responsibility for monitoring the major account and escalating late payment. Consider whether new orders increase exposure faster than the business can finance them. Commercial terms, customer diversification and financing should be discussed together.

Credit insurance may be worth exploring with a qualified provider, but coverage and lender acceptance require separate assessment. Insurance does not mean every invoice will be financed.

Lirodean can help position a financing request around the actual receivables profile. Contact us with your customer concentration and aging reports to discuss possible structures.

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