The Risk of Concentrations!
When talking about revenue or income, the word “concentration” is used by loan underwriting, investors and factors. “Concentration” or Customer Concentration is referring to the percentage of a company’s revenue coming from different customers.
If a business has only 4 customers, then the best case scenario is a concentration of 25%. In other words if they are making $1000/month it came as $250 from Customer A, $250 from Customer B, $250 from Customer C, and $250 from Customer D. That might be broken up differently with say- 10%, 10%, 20%, 60% split of the revenue. The reality is that a business with only 4 customers is very vulnerable to fail, if they have a dispute on even one invoice because it could affect 25% or more of their overall income.
When you get a loan, you have physical collateral to back the loan. When you factor invoices, the future payment of your invoices that is backing the cash advance to you. If your entire business could be put at risk by a customer service issue with one customer, then it’s likely a factoring company can’t help you with cash flow.
No matter what industry you are in, it’s always a good idea to secure several different customers. This way if one of your customers disappears, you’re able to survive the temporary setback and replace them easily.
In general at Steelhead Finance, the maximum concentration level is 25%. For freight customers, we have some tools to help you diversify your customer base, including a preferred broker list with lots of great freight loads, and free load board access for 6 months to Truck it Smart. Please call one our Business Development Consultants (800-727-3377) if you have more questions or need help changing a concentration.
For More Information on Customer Concentrations Check Here:
Recurring Revenue and Customer Concentration from Mergers and Acquisitions For Dummies
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