Diligence
Customer concentration
Customer concentration is the share of revenue depending on a small number of customers. It rarely stops a facility outright; it reduces the leverage a lender will underwrite and tightens what comes with it.
Also called revenue concentration · concentration risk · top customer exposure · key customer dependency
The headline percentage starts the conversation. What ends it is how easily that customer could leave.
| Factor | Weight |
|---|---|
| Headline percentage | Starts it |
| Length of relationship | 25–48 on the scale |
| Contract and notice period | 45–70 on the scale |
| Switching cost and embeddedness | Decides it |
Relative weight a credit team gives each factor. Illustrative market convention; the guides publish no concentration thresholds.
Why lenders care
Because a lender is underwriting the durability of cash flow, and concentration is the most direct threat to it. A business where one customer is a quarter of revenue is a business where one commercial decision, taken by someone else, removes a quarter of the earnings the debt is serviced from.
A clean credit is easy to describe: revenue spread across a book of repeat customers with no dangerous concentration, a three-year trend rising steadily with no single record year doing the work, and around 90% of EBITDA converting to cash. Concentration is the factor that most often breaks the first of those.
It is worth being clear that this is a question about fragility rather than quality. A concentrated business can be excellent, well run and highly profitable. The lender is not judging the business; they are asking what happens to their interest payments if one relationship ends.
What moves their view
Not the headline percentage, which starts the conversation and decides very little on its own.
Length of relationship matters more: a customer of fifteen years reads differently from one of eighteen months at the same share of revenue. Contracted revenue matters more again, particularly where notice periods are long enough to replace the work. And what matters most is how embedded the product or service is, and therefore how expensive and disruptive switching would be.
A supplier whose component is designed into a customer's product, or whose software runs a core process, has concentration on paper and something closer to a partnership in practice. A supplier of a commoditised product bought on price has the same percentage and a materially worse position.
The financial health of the customer matters too, and is frequently overlooked. Concentration in a strong counterparty is a different risk from concentration in one that may not be paying anybody in two years.
Concentration is usually priced as less leverage, not as a refusal. Half a turn on £2m of EBITDA is £1m.
| Revenue profile | Facility |
|---|---|
| Well spread (3.5x) | £7m |
| Moderate (3.0x) | £6m |
| Heavy (2.5x) | £5m |
Illustrative effect on a £2m EBITDA business within the published bank senior 2.5-3.5x band. Derived arithmetic, not a published concentration schedule.
How it shows up in the terms
Rarely as a refusal. Usually as less leverage.
On a business with £2m of EBITDA, a well-spread revenue book supports the upper end of the bank senior range at around 3.5 times, or roughly £7m. Moderate concentration pulls that toward 3.0 times, or £6m. Heavy concentration pulls it to the bottom of the range at 2.5 times, or £5m.
The business has not changed between those three outcomes. Only the lender's willingness to lend against it has moved, and the difference between the first and the third is £2m of facility.
Concentration also shows up in the covenant package: tighter headroom, sometimes a specific undertaking to report the loss of a material customer, and occasionally a mandatory prepayment triggered by losing one. That last provision is worth resisting or at least bounding, because it converts a commercial setback into a liquidity event at precisely the wrong moment.
What counts as a customer
A definitional point that changes the number materially, and one worth settling before diligence rather than during it.
Where several entities belong to one group, a lender will normally aggregate them, so three subsidiaries at 8% each is a 24% relationship rather than three small ones. The same applies where a single procurement function buys for multiple divisions.
It runs the other way too. A business selling through a distributor may look concentrated at the invoice level while the underlying demand is spread across hundreds of end customers. That is a better position than the accounts suggest, and it needs explaining rather than assuming, because a credit team reading a sales ledger will see the distributor.
Where it helps, the analysis reads both ways: by invoicing entity and by ultimate demand. If the second is more favourable, it needs evidencing rather than asserting.
The mitigants that work
Management assurance about the strength of a relationship moves a lender very little, because every borrower says it and none of it is verifiable.
What works is evidence. A contracted order book with meaningful notice periods. A long history of renewals. Demonstrated replacement, meaning a case where a significant customer was lost and the revenue was rebuilt, which is the single most persuasive thing a concentrated business can show because it converts a hypothetical into a track record.
Credit insurance on the receivable, where it is available and affordable, addresses the specific loss a lender fears and is worth pricing even if not taken. Diversification in progress helps if it is real and measurable: new customers won in the last two years, with revenue attached, rather than a pipeline.
What does not work is arguing about the percentage. A credit team that has seen the sales ledger has already formed a view of the number, and disputing it spends credibility on the least persuadable point.
Some mitigants move a lender and some do not. Contracted revenue works; an assurance about the relationship does not.
| Mitigant | Effect |
|---|---|
| Management assurance | Little |
| Long trading history | 22–45 on the scale |
| Contracted order book | 45–70 on the scale |
| Demonstrated replacement | 62–85 on the scale |
| Credit insurance | Addresses the fear |
Relative effectiveness of each mitigant. Illustrative market convention, not measured data.
How it reaches the lender
In the pack, early, with the analysis attached. This is the single most useful thing on this page.
Concentration is visible the moment anyone opens a sales ledger, so it will be found. The only variable is whether the lender reads your account of it or constructs their own. A borrower who volunteers the number, the contract position, the history and the replacement evidence is presenting a managed risk. One who leaves it to diligence is presenting an undisclosed one, and a lender who finds something you did not mention starts looking for the second thing.
The format that works is short: the top five customers by revenue share, how long each has been a customer, the contractual position and notice period, and one paragraph on what would happen if the largest left. That last paragraph should include a number, because the lender will produce one whether or not you do.
Modelling the loss
Supply the sensitivity yourself, because the lender will run it regardless and their version will be less generous.
The useful model shows the largest customer leaving, the direct margin lost, the costs that could realistically be removed in response and over what period, and where the covenants sit at the end of it. On a business with 25% concentration, that scenario frequently takes leverage through the covenant, which is exactly why the lender wanted the answer.
Where it does breach, the honest response is not to hide the model but to size the structure so it does not. A smaller facility with real headroom survives the loss of a major customer; a larger one at the same covenant level does not. Concentration is one of the clearest cases where the right answer is to borrow slightly less than the maximum available.
The structural options
Where concentration is material, three structural responses are worth considering before accepting reduced cash-flow leverage.
An asset-based facility looks at the balance sheet rather than the earnings, advancing against receivables, stock and plant. Where the concentrated customer is creditworthy, the receivable may support a good advance rate even though the earnings look fragile, so the facility follows the assets rather than the profit.
Invoice finance on the concentrated debtor specifically can work for the same reason, though many providers impose their own concentration limits on a single debtor, so this needs checking rather than assuming.
And a smaller cash-flow facility with wider headroom, accepting less leverage in exchange for a structure that survives the risk the lender is worried about. That is frequently the right answer and the least popular one, because it means borrowing less than the business could theoretically support.
Common questions
How much customer concentration is too much?
There is no published threshold, and the headline percentage matters less than borrowers expect. What moves a lender is how embedded the product is and therefore how costly switching would be, the contractual position and notice period, the length of the relationship, and the customer's own financial health. Two businesses at the same percentage can be assessed very differently.
Will customer concentration stop me borrowing?
Rarely on its own. It usually shows up as reduced leverage. On £2m of EBITDA, a well-spread book might support 3.5 times or £7m, moderate concentration around 3.0 times or £6m, and heavy concentration the bottom of the bank range at 2.5 times or £5m. The business is unchanged; the lender's appetite has moved.
What counts as one customer?
Usually the group rather than the entity. Three subsidiaries at 8% each is normally read as a 24% relationship, and the same applies where one procurement function buys for several divisions. It runs the other way with distributors: invoice-level concentration can mask end demand that is in fact spread, which is worth evidencing rather than assuming.
What mitigants move a lender?
Evidence rather than assurance. A contracted order book with meaningful notice periods, a long renewal history, and above all demonstrated replacement — a case where a significant customer was lost and the revenue rebuilt. Credit insurance on the receivable addresses the specific loss a lender fears. Management assurance about the relationship moves very little.
Should I raise concentration before the lender finds it?
Yes. It is visible the moment anyone opens a sales ledger, so the only variable is whether the lender reads your account of it or builds their own. Volunteering the number, the contract position and the replacement evidence presents a managed risk; leaving it to diligence presents an undisclosed one, and a lender who finds one undisclosed issue starts looking for the second.
How should I present it in the pack?
Short and specific: the top five customers by revenue share, how long each has been a customer, the contractual position and notice period, and one paragraph on what happens if the largest leaves. That paragraph should carry a number, because the lender will produce one whether or not you do.
What if the sensitivity breaches my covenants?
Do not hide the model; size the structure so it survives. A smaller facility with real headroom absorbs the loss of a major customer where a larger one at the same covenant level does not. Concentration is among the clearest cases where borrowing slightly less than the maximum available is the right answer.
Are there structures that suit a concentrated business better?
An asset-based facility can work, because it advances against receivables, stock and plant rather than earnings, and a creditworthy concentrated customer may support a good advance rate. Invoice finance on that debtor can too, though providers often impose their own single-debtor concentration limits. Otherwise a smaller cash-flow facility with wider headroom.
The full treatment sits in the guide: what lenders look for in your accounts.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.