A concentration limit restricts how much of a business's financed receivables may come from any one customer. It is usually expressed as a percentage of total eligible receivables or as a fixed dollar amount.
How it works in factoring
If one customer accounts for a large share of a seller's invoices, the factor's results depend heavily on that customer paying. A concentration limit spreads the risk.
Illustrative example: A factor sets an assumed 30% concentration limit. The seller has $200,000 in eligible invoices, of which $100,000 is owed by one customer. Only $60,000 of that customer's invoices (30% of $200,000) would count toward funding at the normal advance rate. The remaining $40,000 might be funded at a lower rate, held until other invoices grow, or excluded.
Concentration limits appear in both factoring and asset-based lending. They can be set for:
- Each individual customer
- Groups of related customers, such as affiliates of one company
- Specific industries or regions
Factors may relax a limit for a very strong customer, such as a large public company or a government agency, or tighten it for a weaker one.
What to check
- Whether the limit is a percentage, a dollar cap or both
- How excess invoices are treated: lower advance, delayed funding or no funding
- Whether limits can change during the contract
If your business depends on one or two large customers, raise the concentration question early. It can change how much cash a factoring arrangement actually provides.