Customer concentration limits in receivables-backed facilities

A receivables pool is only as safe as the customers who owe it. If 40 percent of your AR sits with one buyer, the lender is not really lending against a diversified pool. They are lending against that buyer's credit. Concentration limits force the collateral to stay diversified, so no single default can wipe out a large share of the borrowing base.

Typical caps run from 5 to 20 percent per obligor in ABL facilities. Securitizations often set tiered caps based on the obligor's credit rating, where an investment grade customer might be allowed 15 percent while an unrated customer is capped at 5 percent. The exact numbers always come from your agreement.

The test runs after basic eligibility. First remove ineligible invoices, then measure each obligor's share of what remains. Anything above the cap becomes excess concentration and is deducted.

Excess concentration here totals $2.4 million. At an 85 percent advance rate that removes about $2.04 million of availability. Note that the invoices themselves are fine. Nothing is past due or disputed. The pool is simply too dependent on two customers.

Concentration testing has a hidden dependency: you have to know which invoices belong to the same obligor. ERPs rarely make that easy. The same customer shows up as Meridian Foods, Meridian Foods Inc, and MERIDIAN F&B LLC across three business units, and subsidiaries of one parent are often separate customer records entirely.

Most agreements measure concentration at the obligor group level, meaning the parent and its subsidiaries count together. If your data does not roll customers up to a parent, you will understate concentration, and that is exactly the kind of error a field exam finds.

• Obligor names are normalized and grouped to legal parents before any concentration math runs.
• Caps are configured per facility, including tiered caps by rating or obligor type where the agreement uses them.
• The calculation is deterministic: same inputs and same rules always produce the same excess concentration figure.
• Every dollar of excess traces back to the specific obligor, cap, and invoices that produced it, so the deduction on the certificate is explainable line by line.