What Does “Debtor” Mean Here?
In this context the account debtor is the customer that owes payment on a receivable. It is not necessarily the business borrowing from the lender. A distributor might owe its bank $500,000 while its largest retailer owes the distributor $300,000. The concentration question concerns the retailer exposure within the distributor’s receivables portfolio.
Also separate customer concentration in sales from concentration in receivables. A large customer that pays promptly may represent a large share of revenue but a smaller share of outstanding invoices. A seasonal customer can produce the opposite result near a reporting date. Build both views before describing the business as diversified.
Why Do Lenders Apply Concentration Limits?
The OCC’s Asset-Based Lending handbook discusses concentration risk, receivables eligibility, advance rates, and reserves. It is banking supervisory guidance, not a universal contract term imposed on every borrower. Concentration controls address dependence on a small number of payers; the actual financing documents govern the borrower’s calculation.
For a finance team, the practical problem is timing. Sales can increase while cash access narrows if new invoices sit with an already concentrated customer. A borrowing-base certificate should therefore explain availability movements by cause: collections, new invoices, aging, disputed balances, concentration exclusions, advance rates, reserves, and facility limits. A single net number conceals which operational action might help.
What Should You Read in the Financing Agreement?
| Provision | What to identify |
|---|---|
| Account debtor grouping | Whether affiliated customers, parent companies, branches, or related obligors are aggregated. |
| Denominator | Gross receivables, otherwise eligible receivables, a post-adjustment pool, or another defined base. |
| Threshold and scope | Percentage or dollar limit; customer-specific approvals; whether only excess or a broader amount is excluded. |
| Other exclusions | Aging, disputes, credits, offsets, geography, billing status, or other agreement-specific ineligibles. |
| Order of operations | When exclusions, advance rates, reserves, outstanding balances, letters of credit, and commitment limits apply. |
| Exceptions and discretion | Who can approve a change, required written evidence, expiration, and any lender reserve rights. |
| Reporting and cure | Certificate frequency, supporting records, notice duties, and consequences of an overadvance. |
Do not copy the lender’s percentage into a spreadsheet until these definitions are resolved. Two facilities with the same nominal cap can produce different results because their denominators and exclusion mechanics differ. Keep approved exceptions with the calculation rather than relying on a relationship manager’s informal conversation.
Worked Example: How Does a Concentration Cap Reduce Availability?
All figures and contract assumptions in this example are invented. Assume a $1 million receivables ledger, $200,000 of non-concentration exclusions, and $300,000 owed by Customer A within the remaining pool. The fictional agreement caps that customer at 25% of the $800,000 otherwise eligible pool, excludes only the excess, advances 80%, and subtracts a $30,000 reserve after applying the advance rate. Outstanding borrowing is $500,000. The facility commitment is assumed not to bind, and there are no other availability deductions.
| Calculation | Amount |
|---|---|
| Gross receivables | $1,000,000 |
| Less other ineligible receivables | −$200,000 |
| Pool before concentration test | $800,000 |
| Customer A exposure | $300,000 |
| Customer cap: 25% × $800,000 | $200,000 |
| Excess excluded: $300,000 − $200,000 | $100,000 |
| Eligible receivables after cap | $700,000 |
| 80% advance against $700,000 | $560,000 |
| Less separately assumed reserve | −$30,000 |
| Calculated borrowing base | $530,000 |
| Less outstanding borrowing | −$500,000 |
| Illustrated additional availability | $30,000 |
The $100,000 receivables exclusion reduces availability by $80,000 at the assumed 80% advance rate. This comparison holds all other inputs fixed; it is not a financing offer.
The business still records the customer’s full receivable, subject to its accounting policies. The excluded $100,000 has not been forgiven or automatically become uncollectible. It simply does not contribute borrowing value under the assumed formula. Do not also subtract that same exclusion as a reserve unless the agreement expressly calls for a separate deduction.
What if the Cap, Collections, or Customer Mix Changes?
Using the same fictional pool, a 20% cap would allow $160,000 of Customer A’s exposure and exclude $140,000. The base becomes $498,000 after the assumed advance and reserve, producing a $2,000 shortfall against $500,000 outstanding. A 30% cap would instead produce $62,000 of availability. These are sensitivities, not a recommendation to seek a particular limit.
| Assumed cap | Excluded receivables | Calculated base | Availability / shortfall |
|---|---|---|---|
| 20% | $140,000 | $498,000 | -$2,000 |
| 25% | $100,000 | $530,000 | $30,000 |
| 30% | $60,000 | $562,000 | $62,000 |
Collections change more than one input. If Customer A pays, its receivable balance and the denominator may both fall, and the cash may be swept to repay the loan. A receipt is not necessarily an equal increase in unrestricted cash plus an equal increase in borrowing availability. Reconcile the ledger, lender balance, and bank activity together.
How Does This Connect to a Workout or Reorganization?
Build a dated bridge from reported receivables to cash legally available for payroll and operations. Flag a customer’s disputed invoices separately from an agreed concentration exclusion. Identify whether a projected shortfall is a temporary timing problem, a recurring loss, or an inability to finance the current customer mix.
- Prepare a customer-level aging with related customers grouped under the contract’s rules.
- Reconcile collections and credit notes to the lender’s latest accepted certificate.
- Model a base case and a delayed-collection case without counting the same cash twice.
- Ask what evidence a lender would require for a temporary exception, changed reporting, or forbearance.
- Identify the next payroll, tax, and essential supplier dates, and the person authorized to negotiate.
A profitable sale can still be difficult to fund when inventory and labor are paid before a concentrated customer pays. Alternatives might involve improved collections, changed customer terms, additional equity, a negotiated facility amendment, or a broader restructuring. Their availability depends on the facts; an eligibility calculation cannot choose the legal process.
Debtor Concentration Questions
Is 20% the legal maximum?
No universal 20% ceiling is established by this guide. Identify the operative financing agreement and any applicable regulatory or legal requirements. Industry guidance and a particular lender’s underwriting practices are not interchangeable with your signed terms.
Does “ineligible” mean the customer does not owe the invoice?
No. Financing eligibility, the legal payment obligation, and the accounting assessment of collectibility are separate questions. The reason for exclusion still matters to cash planning.
Is a concentration reserve always the same as a concentration exclusion?
No. The labels and calculation order can differ. One mechanism can reduce eligible collateral before an advance rate while another deducts an amount from availability afterward. Follow the defined formula.
Can we split one customer across accounts to avoid the cap?
Do not assume separate account numbers create separate risk. Apply the agreement’s related-party and aggregation rules accurately and resolve uncertainty with the lender.
Will the cash runway tool calculate the borrowing base?
No. Calculate and verify availability separately using the actual facility terms. The runway tool helps organize cash timing; it does not determine whether a lender must fund.