100% Concentration
What is 100% concentration?
100% concentration is when you have a single debtor. Most factoring companies like to see a spread of debtors and will impose a concentration limit of let's say 50%. That means they will only allow any single debtor to be 50% of the ledger. This means if you have a single debtor or a debtor that represents more than 50% of your ledger your funding will be severely restricted.
Many lenders will apply a concentration limit of 20% which is fine for most of their clients. Sadly, if you require a high concentration limit and you are with the wrong lender this can be a real issue. It is an important consideration when setting up any facility.
What can I do if I have one customer?
Fortunately,? there are lenders out there who are more than happy to finance a single debtor which means that they offer a 100% concentration limit. This can be a real lifeline to clients with one customer or new start businesses who at some stage may only have one debtor.
The wrong concentration limit can cause real issues.
If you have a 100% concentration/single debtor or you have a debtor that really dominates your ledger it is imperative you structure your facility accordingly. If a concentration limit set by a lender is set too low for your business it will have a huge impact on the amount of cash your invoice finance facility can generate. You may think that a lender will simply increase it but unfortunately some lenders have very strict rules regarding concentration and will not adjust upwards. If you have signed up for a lengthy contract this could have severe issues for your cash flow or you could end up paying hefty termination fees to leave early.
Consider a new start temporary recruitment business. Let’s assume they have landed a dream contract supplying a well-known supermarket with temporary staff. The facility offers an 80% prepayment and has a 30% concentration limit.
At the end of month one they are delighted to raise a ?100,000 invoice and log on to draw down ?80,000 for wages expecting this to be available.
Sadly, the 30% concentration limit means only ?30,000 is eligible for funding and the 80% prepayment is applied to this amount.
As such only ?24,000 is available and the temps go unpaid.
You can see that a concentration limit can have catastrophic consequences.
Structure is everything
Our advice is to structure any facility properly from the outset. You must consider any potential restrictions and the concentration limit is one of the most common issues with facilities.
How can Smart Factoring Quotes help?
At Smart Factoring quotes we have years of experience dealing with businesses like yours. We know how to deal with concentration issues or high involvement issues as some lenders call them. WE can source the right lenders and structure that right facility so that your funding is not restricted.
We will gladly talk over your requirement and advise what areas you need to focus on. Please contact Smart Factoring Quotes on 0845 863 0738.
