Can You Get Factoring if Most of Your Receivables Come From One Customer?

Factoring with one large customer can be difficult, even when that customer is the strongest part of the business.

A problem we often come across is a business being penalised because it has landed an enormous customer. To the business, this can feel like a paradox: great, we have an anchor customer, so why does that suddenly make us less attractive to creditors and factoring businesses?

A contractor, staffing company or specialist service business wins a large account. The relationship grows. The customer pays reliably. Revenue improves. In many respects, the business is in a stronger position than it was before.

Then it goes looking for working capital and is told it has a concentration problem.

That can be a frustrating conversation because the lender is not necessarily saying the customer is weak. Quite often the opposite is true. The issue is simply that too much of the receivables book depends on one account.

If 70%, 80% or even 100% of your invoices are owed by one customer, many lenders become uncomfortable. A fair number of factors do too.

From their point of view, the logic is obvious enough. Lose that customer and the shape of the business changes very quickly. But that is only one side of it.

Sometimes the customer creating the concentration is also the strongest credit in the picture.

A telecom contractor may do nearly all of its work for one national carrier or infrastructure group. A staffing business may have grown around one large corporate account. A data-centre contractor may have been pulled deeper into one customer’s programme because it keeps winning more work.

Commercially, that can be a very good place to be. Financing it is where things become awkward.

“Concentration is something you have to understand, but it shouldn’t automatically kill a deal. If the work has been done, the invoices are valid and the account debtor is strong, we’re prepared to look at the substance of that receivable rather than just the percentage.”

Dean Rosenthal, CEO, TowerCap

Some lenders work with fairly rigid concentration limits. Once one customer represents too much of the receivables book, the facility gets capped, repriced or declined. Some factors take much the same view.

TowerCap is comfortable looking at much higher levels of single-debtor concentration, including situations where effectively the whole receivables book sits with one customer.

That does not mean concentration stops mattering. It means we look at what is actually behind it.

Who is the customer? How strong are they? Is the work complete? Are the invoices clean? Is there a history of disputes? How does the customer normally pay?

Those questions tell you rather more than a percentage on its own.

There is another irony here. Concentration often gets worse because the business is succeeding.

A customer gives you more work. You hire more people, add another crew, buy equipment, take on another project. The receivables balance grows at the same time.

If that customer pays on 60-day terms, the business can find itself carrying a lot of cash in work that has already been completed. And because the same customer now represents most of the book, the usual financing options may actually narrow.

Factoring can help because the starting point is the receivable itself.

The work has been completed, the invoice exists and the customer owes the money. Rather than waiting another 30, 60 or 90 days, qualifying receivables can be converted into working capital earlier.

For a business with one dominant customer, that can be the difference between having to slow down and being able to take on the next piece of work.

Diversifying your customer base may still be sensible over time. No one would argue otherwise. But it does not follow that a business should have to turn away good work simply because one strong customer has become too important for a lender’s standard credit box.

If you have been told your customer concentration is too high, it may be worth looking at the receivables differently.

TowerCap works with B2B businesses across the US and Canada and is comfortable considering high single-debtor concentration where the underlying receivables are strong.