Understanding ‘Concentration Risk’ and Why It Matters for Your Clients

In commercial finance, we spend a lot of time discussing affordability, cashflow, trading stability and repayment ability. However, one of the most overlooked risks in a business is something called concentration risk and in recent months, it’s become increasingly important. Especially with the more recent system outages we saw for various companies across the world where a major population were impacted. We also saw a ‘concentration risk’ event with the most recent Cyber attack on JLR group. So this got me thinking, perhaps I write an article to help understand and support where possible.

My life in the finance industry has seen me work as a Risk professional and as a Business Development professional, rather niche I would say. This helps immensely when it comes to client enquiries from our panel of introducers, It helps a great deal when it comes to leadflow vs conversion. I am an advocate of engagement leading to conversion. Quite often the ‘risk’ assessment that was engrained into me at NatWest is a key part.

So, what is Concentration Risk?

In simple terms, concentration risk is when a business relies heavily on just one, or a very small number of customers or suppliers. It can also be geographical

This could look like the following… One customer making up 40%+ of total revenue, Or A business relying on just one key supplier to deliver a core product, another examples is A subcontractor tied to one main contractor for most of their work.

When things go well, this setup can feel stable. Consistent work, reliable billing, and predictable revenue. But if that key partner stops trading, delays payment, changes terms or even just slows down, the business can feel the impact immediately and significantly. Another fine example which is more recent.. Cyber Attacks. Quite often corporations will only have one server or one CRM without a contingency, This then has a major impact on a client base.

Why does this matter for funding?

As lenders, we must consider the resilience of a business. A company whose revenue is spread across multiple customers is naturally more secure and better positioned to absorb shocks.

If a business relies on a single major client, it only takes one problem to disrupt operations, harm cashflow, and increase default risk. As mentioned above.

This is why you’ll sometimes see funders ask questions such as:

• “What percentage of turnover does your largest customer account for?”
• “Do you have multiple suppliers for key materials?”
• “How quickly could you replace a lost contract?”

These aren’t “box-ticking” questions, they are simply there to help assess the stability of the business.

What Introducers Can Do to Help Their Clients

When speaking with your clients, especially ahead of an application, it’s worth gently addressing this risk early:

1. Encourage diversification
   Even adding just a couple of new customers can materially reduce concentration risk.
2. Document key relationships
   Long-term contracts, agreements and retention schedules strengthen a lender’s confidence.
3. Demonstrate continuity planning
   If something did happen to a major customer or supplier, what’s the fallback plan?
4. Avoid overstating reliance
   Transparency goes a long way!! If reliance is high, we can work with the client to mitigate.

Markets are shifting… Payment terms are lengthening… Supply chains are tightening, and customer-buying patterns are changing more quickly than ever.

The businesses that will thrive are the ones who maintain flexibility, resilience and a broad customer base.

At 365 Finance, We are not here just to fund businesses, We want to help them grow sustainably. When we ask questions around concentration, it’s not to decline deals.
It’s to understand our client’s operating model, Identify their strengths and vulnerabilities and ensure the funding is right for the long-term, not just today!

If you’d like support preparing a client for funding, I’m always here to help, whether that’s reviewing documents, pre-qualifying, or simply talking through their commercial structure.

This article was written by Simon Boylan, Senior Partnerships Manager at 365 Finance. Simon works closely with our network of brokers and partners, supporting them in helping UK SMEs secure funding and grow sustainably.