Concentration limits can play a major role in terms of how much cash an invoice factoring or invoice discounting facility can generate. It is important to remember that not all invoice finance companies apply the same concentration limits and as such you need not suffer the consequence of a restrictive concentration limit.
A concentration on a sales ledger is where on customer or debtor accounts for a large percentage of the overall ledger of outstanding invoices. For example if you had a total ledger of £1,000,000 and one customer owed you £500,000 then the overall concentration would be 50%.
A concentration limit limits the amount of exposure a lender has to a single debtor on your ledger. For example some of the traditional invoice finance providers apply a 20% concentration limit.
A good example is a new start recruitment business supplying contractors into an end client. They have agreed an 80% prepayment and the concentration limit is 30%. At the end of the first weeks trading they have invoiced for £100,000. They send this off to the invoice finance provider expecting £80,000 to pay the wages of their contractors. When they check the availability they see that the eligible debt is £30,000 and the availability to draw down is only £24,000.
Total ledger = £100,000
However, this is all with one customer so the concentration limit kicks in.
Eligible debt = £100,000 X 30% = £30,000
Availability = Eligible debt X 80% = £24,000
As you can see this has an enormous impact on how much cash is generated by the facility.
This is a really common problem and either causes cash flow issues or forces you to turn business away from your largest customer.
The good news, is that for start up and scale up recruitment agencies (where there is a higher likelihood of concentration), we fund 100% of the invoice and we apply no concentration limits. For our enterprise customer (larger recruitment agencies) we structure and manage their facility in a way that minimises the impact that concentration limits and prepayment levels bring.