Concentration As It Applies to SMBs

Concentration is the amount of accounts receivable (A/R) due from a single customer or when a few customers represent a sizeable portion of a company’s total sales. Lenders may impose concentration limits to limit the amount of exposure they have to a single debtor on your ledger. Their point of view is relative to risk, and different types of lenders look at concentration differently. For example:

Factors look at their total portfolio to see if they’re over-weighted in any particular area. They underwrite the debtor, not the client. Asset based lenders, on the other hand, monitor by client to ensure lending limits are not impacted. As concentrations impact our clients’ borrowing capacity, at Celtic Capital, our typical concentration limit is 15% (though we will go up to 50% as situations dictate).

Business owners need to be concerned with concentration, too, because a business can be sorely affected when revenue is heavily reliant on one large customer. Some of the risks to businesses include:

Larger companies search for the best quality at the lowest available price. They won’t hesitate to change suppliers whenever a better deal pops up.

Sometimes, the buyer you’ve been dealing with leaves the company and a new buyer is placed on your account. Where does that leave you? Many times, out the door.

If you have revenue concentration with a customer, chances are you’ll likely have A/R concentration with that customer as well. That may make your A/R uncollectible if this customer decides to leave you without paying first.

Even if a large customer doesn’t leave, your cash flow can be affected by that concentrated account. Cash flow is subject to the payment habits of that customer and if that account slow pays, there goes your cash flow.

You know that large accounts are going to squeeze you on margins. You won’t be as profitable (if profitable at all) yet this customer will take up more of your time than your other customers; a big danger.

When there’s a problem with a customer’s product, there’s a domino effect – sales could be in jeopardy which puts revenue in jeopardy which could put this customer out of business. If you have a large concentration with this company, you could go out of business, too.

It’s always difficult to turn away a large order; the rewards are great. Being aware of the risks is half the battle. You can mitigate the risks by doing such things as diversifying your customer base, staying in control of the relationship, not being afraid to say “no,” and offering expedited payment terms.

About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.

As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.

If you know of, or are, a business in need of non-traditional financing, contact Mark Hafner at 800.742.0733 or, or visit us at