Concentration Risk

Concentration risk in invoice finance refers to the risk that arises when a large proportion of a business's outstanding invoices are owed by one or a small number of customers. If that customer fails to pay, the impact on both the business and the finance provider is disproportionately large.

Invoice finance lenders typically apply a concentration limit, usually 25% to 35% of the total eligible ledger for any single debtor. Invoices from a customer that would push the concentration above this limit may be excluded from the eligible ledger or funded at a lower advance rate.

Businesses that are highly dependent on a single large customer often need to address concentration risk before accessing mainstream invoice finance. Solutions include credit insurance on the concentrated debtor, or using a specialist lender who accepts higher concentration in exchange for premium pricing.

Example

A business with £500,000 in total debtors where £200,000 (40%) is owed by a single supermarket chain. Most invoice finance lenders would apply a concentration limit, capping their exposure to that debtor at around £125,000 to £175,000.

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