What is a concentration limit in factoring?
A concentration limit is the maximum share of your factored receivables that any single customer can represent before the funder stops advancing against that customer’s invoices. If your limit is 40% and one customer owes 70% of your open invoices, the funder will usually advance only on the portion up to 40%. The rest becomes ineligible or is advanced at a reduced rate.
Funders use concentration limits for the same reason you lose sleep over a big customer: if that payer slows down, disputes a batch, or files for bankruptcy, most of the collateral goes bad at once. Diversity spreads risk. One customer at 70% is the opposite.
| Customer profile | Typical limit range | Why |
|---|---|---|
| Small private company, limited credit data | 15%–25% | Hard to assess, little public information |
| Mid-size private company, good payment history | 25%–40% | Track record supports more exposure |
| Large rated company (investment grade) | 50%–100% | Low default risk, deep credit data |
| Federal, state or local government agency | Often 50%–100% | Payment risk is low; assignment rules apply |
| Customer insured by a credit insurer | Up to the insured limit | Insurer absorbs much of the insolvency risk |
Will a factor work with me if one customer is 60% or more of my sales?
Many will, if the big customer is strong. A Fortune 500 retailer or a federal agency at 80% of the ledger can be easier to fund than ten tiny customers with no payment history. The funder is asking one question: if this customer doesn’t pay, how bad is it, and how likely is that?
Where concentration becomes a decline is when the big customer is a mid-size private company with little credit data, slow or erratic payment, or a history of disputes. A funder can’t diversify away that risk, so it either sets a low limit that leaves you short or passes.
Government contractors live with concentration by design. If your main customer is a federal agency, funders will need the contract assigned under the Assignment of Claims Act. See government contractor factoring for how that works.
How does credit insurance help with concentration?
Trade credit insurance protects against a customer failing to pay because of insolvency or, under some policies, protracted default. When a large account is insured, the funder can lean on the policy and raise the concentration limit, sometimes up to the full insured amount. The policy is often assigned to the funder as loss payee.
Insurance costs money, and insurers set their own limit on each buyer. If the insurer will only cover $500K of exposure to your big customer, that is usually the practical ceiling. Policies also exclude commercial disputes, so they don’t help when a customer refuses to pay because of quality complaints. Some funders arrange coverage as part of a non-recourse structure; others ask you to bring your own policy.
How can I structure a facility around one big customer?
The best structures match funding to the real risk instead of fighting the limit. Here are the options funders commonly use.
- Debtor-specific limit. The funder approves a dollar limit on the big customer based on its credit, separate from the overall percentage cap.
- Tiered advance rates. For example, 85% up to the limit and 60% above it, so excess invoices still produce some cash.
- Credit insurance assignment. An insured buyer limit lets the funder go higher with less reserve.
- Spot factoring the big account. Factor only selected invoices from the large customer. See spot vs. whole-ledger factoring.
- Pair with a larger facility. For high volume, a large AR facility or ABL line may handle concentration better than a small factor.
- Diversification plan. A written plan to add customers, with the limit stepping up as the ledger spreads out.
What risks should I plan for beyond the funding?
Concentration is a business risk before it is a financing problem. If one customer is most of your revenue, that customer controls your pricing, your terms and, in a downturn, your survival. Factoring helps you carry long payment terms, but it does not reduce the chance of losing the account.
Plan for three scenarios. If the customer stretches terms from 45 to 75 days, your fees rise and availability shrinks, so model that in the cash gap calculator. If it disputes a large batch, recourse provisions may require you to buy back those invoices. If it leaves, your facility shrinks with it, so keep enough margin to survive the transition.
Read contracts with the big customer for anti-assignment clauses. Under UCC Article 9, terms that prohibit assigning accounts receivable are generally ineffective against a factor, but customers still push back operationally. Raise factoring early with their AP team.
Track concentration monthly. Funders often recalculate it on every funding, so a slow month from smaller customers can push the big account over the limit and cut availability without warning.
What does it cost to factor a concentrated ledger?
Concentration by itself rarely drives the fee, though it shapes everything around it. Fees commonly run roughly 1% to 5% of invoice value per 30 days, and a single high-volume, creditworthy customer that pays on time often earns pricing at the lower end. Where concentration costs you is availability: invoices over the limit don’t produce an advance, so your effective funding is smaller than your sales.
If you insure the account, add the premium to the cost comparison. Run several proposals through the factoring cost calculator with the concentration limit applied, not just the headline rate.
What will a funder ask about my biggest customer?
Expect the funder to study your largest customer more closely than your own company. It is the real credit behind most of the facility, so the questions go deep.
- Payment history: 12 to 24 months of invoice and payment dates, showing average days to pay.
- Contract terms: length, renewal, termination rights, payment terms and any clauses on assignment or setoff.
- Dilution: how often the customer takes credits, chargebacks, deductions or short-pays, and why.
- Relationship depth: how long you have served them, how many buyers or sites you work with, and whether you are a sole or secondary supplier.
- Contra exposure: whether you buy anything from the customer, which could let it offset what it owes you.
- Public information: credit ratings, filings and news that suggest financial strain at the customer.
Should I reduce concentration before I factor?
You don’t need to reduce concentration before you factor, and trying to diversify in a hurry can hurt more than it helps. Taking on weak new customers just to lower a percentage adds credit risk the funder will discount anyway. Fund what you have, then diversify deliberately.
Factoring can actually make diversification easier. Owners stuck on one big account often can’t afford to chase new customers because cash is tied up waiting on long terms. Steady advances free up time and money to bid on new work. Some funders write a step-up into the facility: as a second or third customer grows past a set share of the ledger, the concentration math improves and availability rises. If growth is the reason you are short, read growth outpacing credit for ways to plan funding around new contracts.
Step by step
- Measure concentrationCalculate each customer’s share of open receivables and of trailing 12-month sales.
- Document the big customerGather its payment history, contract, purchase orders and any credit rating.
- Check assignment termsReview the customer contract for anti-assignment language and AP procedures.
- Price insurance if neededGet a credit insurance quote on the large buyer to support a higher limit.
- Model availabilityApply each proposed limit and advance rate to your ledger to see real cash, not headline numbers.
Illustrative scenario
Distributor with one national retailer
A Tampa wholesale distributor of home goods sold about $1.4MM a month, with 72% going to one national retail chain on net 60 terms. Its first factor capped any debtor at 35%, leaving roughly half of its receivables unfunded during the holiday build.
- New funder set a debtor-specific limit on the retailer supported by an assigned trade credit insurance policy.
- Advance rate of 85% up to the insured limit and 65% above it.
- Smaller customers advanced at 80% under a standard 25% concentration cap.
- Quarterly review to raise the limit as the insurer increased coverage.
Outcome: Availability against the retail account roughly doubled, the distributor funded its seasonal inventory, and the insurance premium cost less than the margin on the orders it would otherwise have declined.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
What concentration limit is normal in factoring?
Limits of 20% to 50% of the ledger per customer are common. Investment-grade companies and government agencies often get much higher limits, sometimes the entire ledger. The limit depends on the customer’s credit, not just your preference.
What happens to invoices over the concentration limit?
They are usually treated as ineligible, so the funder doesn’t advance against them, or advanced at a reduced rate. The funder still collects them if they are assigned, and releases the balance to you after its advance and fees are covered.
Can I factor just my one big customer?
Yes. Some businesses factor only their largest or slowest-paying customer. Funders may be comfortable if that customer is strong, and you keep full control of the other accounts.
Does trade credit insurance remove concentration limits?
It can raise them, often up to the insurer’s approved limit on that buyer. It doesn’t cover disputes over quality or delivery, and the insurer sets its own ceiling. Treat it as one tool, not a blanket fix.
Will my big customer refuse to work with a factor?
Most large companies pay factors routinely and have procedures for notices of assignment. Some resist operationally even when contract restrictions on assignment are not enforceable against the factor. Talk to their accounts payable team early and keep the process simple.
Is customer concentration a reason banks decline?
Yes, it is one of the most common reasons. Banks see a single customer as a single point of failure. Factors handle it with per-customer limits and credit review instead of a flat no.
Can my concentration limit change after I sign?
Yes. Most agreements let the funder adjust limits if a customer’s credit weakens or payments slow. Limits can also rise as the customer proves itself or as your ledger diversifies. Ask how often limits are reviewed and how much notice you get.
Does a government customer count against concentration limits?
It still counts, but funders usually allow much higher limits for federal, state and local agencies because payment risk is low. Federal receivables require a proper assignment under the Assignment of Claims Act. Slow agency payment cycles can still affect your cash planning.