Overview
Lenders treat customer concentration as a liquidity and repayment risk: if a few clients supply most of a borrower’s revenue, the loss of one can quickly undermine cash flow and the ability to service debt. In my 15 years advising business borrowers and underwriting deals, I’ve seen concentration both trigger stricter covenants and become a negotiation point for collateral and pricing.
How lenders measure concentration
Lenders look beyond a single percentage. Common steps include:
- Itemizing revenue by customer on recent financial statements and A/R aging reports.
- Calculating top-customer shares (top 1, top 3, top 10) as a percent of sales and gross margin.
- Reviewing contract terms, renewal history and the creditworthiness of top customers.
- Stress testing cash flow if one or more top customers stop ordering.
- Checking whether concentrated revenue is backed by long-term contracts, purchase orders, or letters of credit.
Thresholds are directional, not universal: many lenders view <20% to a single customer as low risk and >50% as high risk, but acceptable limits depend on industry, margin stability, and contract protections.
Common lender responses
If concentration is high, lenders commonly respond by:
- Requiring personal guarantees or additional collateral (e.g., inventory, receivables).
- Adding concentration covenants that limit single-customer exposure or require notice of contract changes.
- Pricing the loan higher or shortening amortization to reduce credit exposure.
- Preferring invoice financing or factoring arrangements where receivables can be assigned.
For practical examples of how lenders value recurring contracts and receivables as collateral, see our guide on How Lenders Value Recurring Service Contracts as Collateral and Creative Collateral: Using Inventory and Receivables to Secure a Business Loan.
Real-world examples
- A manufacturer with 75% of revenue from one OEM faced a loan covenant requiring monthly reporting and a higher pricing tier; the lender also insisted on a third-party receivables collection arrangement.
- A SaaS provider with 80% revenue from one enterprise client negotiated a renewal-term covenant and accepted a subordination of certain assets to secure funding.
Actionable steps to reduce concentration risk
- Track and report: maintain a rolling top-customer report (top 1/3/10) and monitor trends quarterly.
- Diversify sales channels: add at least one new sales channel or vertical every 12–18 months.
- Negotiate contract protections: convert large customers to multi-year contracts or add minimum-purchase clauses.
- Use financial tools: consider invoice factoring, trade credit insurance, or revenue-based covenants to smooth cash flow.
- Communicate proactively: provide lenders with customer credit checks, diversification plans, and scenario stress tests during underwriting.
Quick reference table
| Customer concentration (single or top 3) | Typical lender view | Likely lender actions |
|---|---|---|
| 0–20% | Low risk | Standard terms, minimal extra covenants |
| 21–50% | Moderate risk | Possible collateral, covenant language, higher pricing |
| 51%+ | High risk | Strict covenants, additional collateral or limited loan size |
Common mistakes to avoid
- Assuming industry norms eliminate lender concern—some lenders remain conservative even in concentrated sectors.
- Hiding concentration in aggregated revenue lines; lenders will request schedules of top customers.
- Failing to document contract length or renewal likelihood—verifiable evidence matters.
FAQs
- How much concentration is acceptable? There’s no single answer—many lenders consider <20% to a single customer comfortable, but context (contracts, margins, receivable terms) matters.
- Can high concentration still get a loan? Yes—if you provide mitigating factors (long-term contracts, strong customer credit, collateral, or higher pricing).
- Do lenders ever buy concentration risk down? Lenders don’t typically insure it; borrowers reduce risk through diversification or transfer risk with insurance/factoring.
Practical checklist for loan applicants
- Prepare a customer revenue schedule and A/R aging report.
- Supply copies of key customer contracts and purchase orders.
- Run a three-scenario cash-flow stress test (base, -25% top-customer sales, -50% top-customer sales).
- List mitigation options you’re willing to accept (personal guaranty, escrowed reserves, additional collateral).
Sources and further reading
- Consumer Financial Protection Bureau — small-business lending overview: https://www.consumerfinance.gov
- U.S. Small Business Administration — finance & lending resources: https://www.sba.gov
- FinHelp glossary: How Lenders Model Concentration Risk for Small-Business Portfolios
Professional disclaimer: This content is educational and does not replace tailored legal, tax, or lending advice. Consult a financial advisor or lending professional for recommendations specific to your business.
In my practice I’ve found that transparent reporting and early diversification discussions with lenders often produce better terms than waiting until a renewal or distress event.
