invoice factoring and Customer Concentration
Having a lot of customers is always a good thing it shows your business is doing something right. But when one or two customers make up most of your sales, that’s a very different story. Relying too heavily on a single account can be risky. If that customer slows down, changes vendors, or runs into trouble themselves, your revenue could take a major hit overnight.
It’s like putting all your eggs in one basket, if that basket drops, everything breaks. Diversifying your customer base helps protect your business from sudden downturns and gives you more control over your future. A healthy mix of customers across industries, sizes, and payment habits not only reduces risk but also strengthens your cash flow and negotiation power.
When it comes to any type of business financing, having too much of your revenue tied to just a few customers can work against you. Lenders, especially factoring companies like to see a healthy, diverse mix of customers. Why? Because it spreads out the risk.
If one customer stumbles or delays payment, it won’t send shockwaves through your entire business. A balanced customer base tells a lender that your revenue is stable and predictable, which makes you a safer bet.
In fact, the benefits go beyond just risk reduction. Businesses that use invoice factoring with a diversified customer mix often qualify for higher advance rates, lower discount fees, and faster reserve releases. In some cases, it can even mean less verification and fewer questions from your factor.
A 20% customer concentration level is generally considered healthy because it strikes a balance between profitability and risk management. Here’s why that number makes sense to most lenders and factoring companies:
It Limits Dependency
If no single customer accounts for more than 20% of your total sales, losing that customer won’t cripple your business. You might feel the impact, but it’s manageable, your cash flow and operations can still continue without major disruption.
It Signals Stability to Lenders
From a lender’s perspective, concentration equals risk. If one client makes up 50% or more of your revenue, that client effectively controls your business’s fate. Keeping concentration at or below 20% shows that your revenue is diversified and less likely to collapse if one account slows payments or disappears altogether
It Improves Borrowing Power
Factoring companies often tie advance rates and reserve releases to concentration. A business with low concentration risk (under 20%) may qualify for:
- Higher advance rates (since the portfolio is more stable)
- Lower discount fees (because risk is spread out)
- Faster approvals and lighter verifications (as each debtor poses less exposure)
Why the 20% Rule Matters
Having a big customer is great, until that customer becomes too big. When one client starts to represent most of your revenue, it can create major risk. That’s why many lenders and factoring companies use the 20% concentration rule as a healthy benchmark.
It Keeps You from Becoming Too Dependent
If no single customer makes up more than 20% of your total sales, losing them won’t sink your business. Sure, it might sting, but your operations and cash flow can still move forward without major disruption. It’s all about balance and not letting one customer have too much control over your bottom line.
It Shows Stability to Lenders
Lenders and factors look at concentration the same way they look at risk. When one client makes up half your revenue, that client essentially holds the fate of your business in their hands. By keeping concentration around 20%, you’re showing that your revenue is diversified, steady, and less likely to crumble if one account slows down or disappears altogether.
It Boosts Your Borrowing Power
Factoring companies reward businesses that spread out their risk. When your receivables are balanced, you’re more likely to qualify for:
- Higher advance rates — because your customer base is more stable
- Lower discount fees — since the risk is shared among many customers
- Faster approvals and lighter verification — as no single debtor poses a major threat
In short, the more diverse your customer base, the more comfort a factor has with funding you.
It Encourages Healthy Growth
Keeping customer concentration low pushes you to keep prospecting, expanding, and building new relationships. Instead of depending on one “whale” account, you’re constantly adding new sources of revenue. That kind of proactive approach strengthens your business and opens the door to long-term stable growth.
It’s a Common Standard Across the Industry
While every industry is different (think niche suppliers), the 20% threshold has become a go-to benchmark among lenders, underwriters, and factors. It’s a quick way to gauge how well-diversified your customer base really is.
How Factoring Companies Apply the 20% Rule
Measuring Concentration
When a factor reviews your accounts receivable, they look at total exposure by customer, basically, how much each customer represents out of your total receivables. While there may be negotiations on which customers to factor, the diversification remains an important consideration.
For example:
- Total receivables: $500,000
- One customer owes: $100,000
- That’s a 20% concentration
Anything above that line may start to raise flags. Most factors will set a “concentration limit,’ usually between 20% and 25% to make sure no single debtor carries too much weight.
Putting It into Practice
If a customer does exceed the limit, the factor may:
- Cap the advance on that account (e.g., only advance funds up to the first $100K of invoices)
- Hold back extra reserves as a cushion
- Require credit insurance on that specific debtor
- Do more frequent verifications to stay ahead of risk
These steps protect both you and the factor. If your biggest customer slows down or defaults, it won’t derail your entire factoring relationship.
Key Take Away. Keeping customer concentration around 20% isn’t just a standard lending requirement, it’s a smart business move. It shows financial discipline, lowers your risk, and can actually unlock better financing terms. A diverse customer base gives you flexibility, leverage, and peace of mind.