Why Do Factoring Companies Worry About Concentration Risk?
Concentration risk is the risk that comes from one customer owing you a large share of your unpaid invoices. If that customer pays late or fails, the lender could lose a lot at once. So lenders set a concentration limit: the most they will fund against any one customer. Each lender sets its own limit.
How a concentration limit works
A concentration limit is the most a lender will fund against any one customer. It is usually set as a share of your total unpaid invoices. Invoices to that customer above the limit can still be financed only if the lender agrees; otherwise they are left out.
A made-up example
You are owed £200,000 in total. One customer owes £120,000 of that, which is 60%. If your lender's limit is 40% of the total, it will count up to £80,000 of that customer's invoices. The other £40,000 is left out, so the lender works from £160,000 of invoices, not £200,000. The 40% is made up to show the idea. Each lender sets its own limit, so ask for it in your quote.
Why lenders set one
Invoice finance is paid back when your customers pay. If most of the money is owed by one customer and that customer pays late, disputes a bill or fails, the lender may not get its money back. Spreading the money across several customers makes a large loss less likely.
What lenders may do if one customer is very large
- Fund only part of that customer's invoices, as in the example.
- Agree a higher limit for a customer it sees as a strong payer, sometimes with credit insurance on that customer.
- Offer different terms, or decline, if the business depends on one customer.
What to do next
- Work out what share of your unpaid invoices each of your biggest customers makes up.
- Ask each lender for its concentration limit and whether it will raise it for your largest customer.
- If one customer could hurt you badly by not paying, look at credit insurance as well.
Related questions
Can I get invoice finance with just two customers?
Sometimes, if both are reliable payers. Expect the lender to look closely at them and possibly set a limit on each.
Do limits apply to factoring and invoice discounting?
Yes. Both are paid back by your customers, so lenders look at how much depends on each one in both cases.
What if my main customer goes into administration?
On a recourse facility you will usually have to repay what the lender advanced on that customer's invoices. On a non-recourse facility, the bad debt cover may pay some of it, within its limits. See recourse vs non-recourse.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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