If you’ve been looking around at recruitment funding options, you may have come across some providers which advertise “no concentration limit.” So what is a concentration limit and why does it matter?
Put simply, a concentration limit is the total percentage of your ledger which your funder is willing to advance in respect of one end client. If you have a ledger size of £500,000 and a concentration limit of 20%, your funder would only be willing to advance up to £100,000 in respect of any one client, depending upon the prepayment percentage.
Why are funders concerned about concentration limits?
In the invoice discounting and factoring sector, your funder will usually disapprove invoices once the debt reaches a specific age, which is often 90 days. When your funder disapproves the invoices, they will typically exercise recourse and deduct the value of those invoices from the monies which are available for you to draw down.
From the funder’s perspective, if your business is too concentrated with one particular client, you will be less likely to financially recover from that client’s invoices being disapproved. Put another way, your funder is keen to ensure that your risk is evenly spread across a wide range of clients.
Do all funders impose a concentration limit?
Some funders advertise that there is no concentration limit, particularly if they are providing a factoring or full back-office service rather than traditional invoice discounting. That said, even if there isn’t an official concentration limit in your funding agreement, your funder is likely to be monitoring your concentration levels with each client. If your funder becomes uneasy about your trading level with one particular client, they may reserve the right not to fund future invoices. It’s therefore important to engage with your funder in a constructive manner if they flag any concerns about concentration.
Is it better to use a funder which doesn’t specify a concentration limit?
This very much depends upon how your want to run your business and the risk profile of your clients.
If your main client is a robust, blue-chip company like, say, Apple or Microsoft then you might feel very comfortable with a high concentration level. Some funders will facilitate that arrangement.
However, if you’re dealing with smaller clients which are more likely to fail, you will be exposing your business to a much higher risk of failure if your freelance business is built upon one or two specific clients. Even if you are insuring the debt and only liable for the policy excess, losing 50%+ of your revenue overnight would inevitably have significant repercussions. For this reason, you should keep a close eye on your concentration levels, even if your funder doesn’t specify a limit.
