What is Debtor Concentration?
Debtor concentration refers to the percentage amount of accounts receivable owed by a single debtor, or customer. If you do business with only one customer, your debtor concentration is 100%. If a single debtor accounts for one-third of your total accounts receivable, your concentration with that debtor is 33%. Typically, a higher debtor concentration means a less diversified customer portfolio and an increased financing risk.
Why does Debtor Concentration Matter?
A high debtor concentration can negatively impact your ability to obtain funding or limit the amount of capital you can receive from a specific lender. Oftentimes, banks and factoring companies don't want to extend credit to a client with high debtor concentration because all their eggs are in one basket, so to speak. This lack of diversification imposes a risk when that debtor is suddenly incapable of paying, and the lender cannot collect on those invoices.
If you have a lot of customers, debtor concentration is not an issue. However, there are many businesses that rely on a few, or perhaps, a single debtor for various reasons. Many oil and gas companies, general contractors and small businesses that can only take on one project, for example, fall under this category.
You Can Obtain Funding Even if You Only Have One Customer
Due to the higher risk, some accounts receivable companies won't consider working with a client that has a high debtor concentration. In some cases, they won't even take time to do the due diligence to learn more about the client and its customers. And even if they are willing to purchase those invoices, they may limit the amount advanced which can limit your ability to grow.
But you do have options. If you have a high debtor concentration, be up-front with your financing partner. Let them know your situation and help them understand your business, your customer, your history with that customer, and your future growth potential. Commercial Funding, Inc. (CFI) can often help companies with a high or even 100% debtor concentration, as long as those companies have a credit-worthy customer. Unlike a bank, CFI researches and evaluates the client's debtor to evaluate payment performance over time. Often, despite the lack of diversification, this limits the risk of financing receivables for a company with higher concentrations.
If your company has a high debtor concentration and is looking to finance receivables with a factoring company that can grow with you, give us a call.