The impact of concentration limits on a factoring facility

Concentration limits are often ignored until funding is restricted and at this stage it is often too late.

A concentration limit indicates how much of a debtor book a lender will allow with a single debtor. When I say allow I mean how much they will consider eligible for funding.

Let’s look at an example. Mr G Raffe Ltd set up a facility with one of our friends at a major high street bank. He is a new start company selling widgets which the high street bank are delighted about as it is a favoured sector for the factoring industry. They have offered him an 80% prepayment and Mr G Raffe is delighted. He noticed a 30% concentration limit in his agreement but didn’t want to ask what it was and as it was so well hidden in the agreement he decided to ignore it.

Not long after opening for business he receives and order for £100,00 including VAT from a large reputable supermarket chain. He is delighted. He delivers the widgets as agreed, gets a signed proof of delivery and raises and invoice. He places this on the banks system and looks forward to having £80,000 available the next day (80% x £100,000). It will be useful to pay wages and his supplier.

The next day he logs into the system. He can see the £100,000 that he has uploaded but the available balance is only £24,000. This can’t be right surely.

As the bank have a 30% concentration cap they will only consider 30% of this debt as eligible. As such they view the eligible ledger as £30,000 and then apply the 80% prepayment.

The effective prepayment is only 24%!!!!

Not all lenders impose a concentration limit and are happy to finance against a single debtor. Had Mr G Raffe set up a properly structured facility for his business he would have been able to access more than 3 times the amount of cash that the bank was offering him.

Concentration limits are very important when considering a factoring facility. For some businesses they have no impact whatsoever on their funding but for some businesses it can be catostrophic.

It is important you consider how the structure of a facility can impact on your funding. This needs to be done when setting up the facility and before you sign up for a lengthy contract.

In the first instance why not contact Smart Factoring Quotes on 0845 863 0738

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