Customer concentration limits: when your biggest customer shrinks your credit line

Landing a huge customer is supposed to be good news. Then your next borrowing base certificate arrives and availability went down. Sales up, borrowing capacity down, and the culprit is one line: excess concentration. Your new flagship account now represents 15 percent of your receivables, your agreement caps any single obligor at 10 percent, and the balance above the cap simply does not count. It is one of the least intuitive rules in receivables finance, and one of the most common sources of certificate surprises we see.

Why do concentration caps exist?

The lender's collateral is a pool, and a pool is only as diversified as its largest pieces. If one customer owes 40 percent of your AR, the facility is no longer secured by a portfolio of receivables. It is secured, mostly, by one company's willingness and ability to pay. That customer's bankruptcy, or even a payment dispute, would vaporize collateral faster than any gradual deterioration in the rest of the book. The cap forces the funded collateral to stay diversified even when your revenue is not. Lenders learned this the hard way, one concentrated portfolio failure at a time, which is why the rule shows up in nearly every receivables facility in some form.

Note what the cap does not do. It does not make the big customer's receivables ineligible. The balance up to the cap counts fully. Only the excess above the cap is deducted, which is why concentration is usually presented as its own adjustment line rather than folded into ineligibles.

One detail worth checking in your own agreement: the denominator. Most facilities measure concentration as a percentage of eligible receivables after the other exclusions, not gross AR. That means the cap moves every cycle. When aging ineligibles rise, eligible AR shrinks, the dollar cap shrinks with it, and a customer whose balance did not change can drift into excess. Borrowers who compute concentration against gross AR routinely understate the deduction and get corrected by their lender's recomputation.

A worked example: 10 percent cap, one obligor at 15 percent

Say your eligible receivables, after aging and the other tests, total $20 million, and your largest obligor owes $3 million. Your agreement caps each obligor at 10 percent of eligible AR.

That $1,000,000 excess costs you $850,000 of availability at an 85 percent advance rate. Now watch what happens when the big customer grows. If they add another $1 million of orders and the rest of the book stays flat, eligible AR rises to $21 million, the cap rises to $2.1 million, and the excess grows to $1.9 million. You booked $1 million of new receivables and gained about $85,000 of borrowing capacity. Roughly 90 cents of every new dollar from that customer is unfundable. Any growth plan built on borrowing against receivables needs to know this before signing the big contract, not after.

The obligor identity problem

Concentration is measured per obligor, and obligor is a legal concept, not a data field. Your ERP might carry Acme Corp, ACME Corporation, and Acme Corp. (Ohio) as three customers with balances of $800,000, $700,000, and $500,000. No individual record breaches a $2 million cap. Combined, they are one $2 million obligor sitting exactly at the line, and one more invoice tips it. Most agreements go further and require rolling up affiliates: a parent and its subsidiaries commonly count as a single obligor group, because in a bankruptcy they tend to fail together.

This is genuinely hard to do in a spreadsheet, and it is where understatement usually hides. Field examiners look for it specifically, and a concentration understatement discovered by your lender lands very differently than one you disclosed yourself. Matching entity name variants and maintaining parent and subsidiary rollups is exactly the kind of messy interpretation work AI handles well, which is how Olycor approaches it: AI resolves the identities, and the deterministic engine applies the cap to the rolled up group, the same way every cycle.

Tiered caps: why ratings buy headroom in securitizations

Securitizations refine the idea with tiered caps based on obligor credit quality. A typical program might allow each obligor rated A or better to reach 10 percent of the pool, BBB names 6 percent, and unrated obligors 3 percent. The logic is straightforward: a stronger obligor can safely be a bigger share of the collateral. The practical consequence is that data quality directly buys availability. If your reporting cannot reliably link customers to their rated parent entities, every obligor defaults to the unrated tier, and the caps quietly compress your funding. We have seen borrowers recover seven figures of availability just by fixing the entity mapping that fed their tiering.

Monitoring concentration between certificates

Concentration is unusual among borrowing base rules in one respect: it is entirely forecastable. Aging surprises you when a customer silently stops paying. Concentration moves with your own invoicing and your own collections, both of which you can see weeks ahead. The borrowers who never get surprised by the excess concentration line treat it as a weekly operating metric, not a monthly certificate output. Four habits do most of the work:

• Track your top 10 obligors weekly against the cap, on rolled up balances, not raw ERP customer records.
• Flag any obligor within 2 percentage points of its cap so collections can prioritize that name before the cutoff date.
• Model big deals before you sign them: a contract that doubles one customer's balance changes your funding math immediately.
• When excess concentration is persistent, raise it at the next amendment: lenders commonly grant higher named caps for specific strong customers, backed by credit insurance where needed.

The theme across all four: concentration is a number you can see coming. It moves with invoicing and collections, both of which you control days or weeks before the certificate date. Treat the cap as a live operating constraint, and the excess concentration line stops writing surprises into your availability.

A concentration cap does not punish you for having a big customer. It reminds you that your lender did not underwrite them.