Into The Lender's Mind #11 The risk of customer concentration and how to dilute it

A business is a pure strategy game. Don’t let your customers to play it for you.

Customer concentration is a risk

Today I’ll cover:

• A Hidden Risk Killing Valuation: Customer Concentration

• When One Customer Owns You (and how to take back control)

• Your Top Customer Is a Blessing, until They’re Not

Don’t let one customer decide your margin, your roadmap, or your weekend.
And I know for many companies, they do.

What does this mean

Customer concentration = too much revenue tied to too few buyers.
Red flag thresholds (rule-of-thumb):

• CR1 > 25% (your #1 customer > 25% of revenue)

• Top 3 > 50% or Top 5 > 70%

• Any single buyer > 15% and > 25% of gross margin = serious risk

Why it hurts (even when sales look great)

• Pricing power flips: Big customer squeezes terms and your margin bleeds.

• Cash flow risk: One delayed payment = payroll panic. DSO spikes.

• Bank covenants: Perceived risk leads to tighter covenants, higher rates.

• Valuation haircut: Buyers/investors discount concentrated revenue (often 1–3x EBITDA off).

Strategy drift: You build for one customer, not the market.

One work experience story

When I first started at Lloyds Bank as a Relationship Manager, I inherited a manufacturing portfolio of nearly 200 clients.

Some were very good clients. Some were struggling. And some were on what we called the “red flag list.”

Those were the businesses that made lenders nervous — the ones you watch closely.

Red flags could include:

• Repeatedly missing loan repayments

• Breaching loan covenants

• Refusing to provide financial information

• Thin margins with no buffer for shocks

• Aggressive director withdrawals that drain cash

• Sudden, unexplained changes in financial performance

One client stood out.

On paper, they looked strong: Turnover close to £2M, healthy margins, no debt. great account conduct.

Yet, they were on the red flag list. Why?

I called the colleague I inherited them from to understand why. The reason shocked me:

They were a gin manufacturer with one single client.
No matter how healthy the numbers looked, that concentration risk meant the bank had to flag them.
If that one client walked away, everything collapsed overnight.

It was one of my first real lessons in lending: strength on paper can hide fragility in reality.

How to reduce the power of one big customer

(A playbook you can start using this quarter)

Products & Pricing

• Offer different versions of your product (“good / better / best”) so big customers can’t force one price across your whole range.

• Create a cheaper, “white-label” version for mid-size buyers who don’t need the premium brand.

• Decide your minimum price in advance (based on profit, not feelings) and walk away if a deal doesn’t meet it.

Customers & Sales Channels

• Don’t let any single customer be more than 15–20% of your total sales unless your board signs it off.

• Open up a second sales route e.g., through distributors, resellers, or online marketplaces.

• Target 10 new accounts with small trial projects, and aim to convert at least 3 into steady clients within 6 months.

• Each quarter, enter a new region, sector, or type of customer to spread your risk.

Payments & Cash Flow

• Set clear credit limits (how much customers can owe you) and different payment terms depending on their risk level – see the newsletter about setting guardrails.

• Reward early payments with small discounts (0.5–1.5%) and charge late fees to discourage delays.

• Use credit insurance to protect yourself from late or missed payments from your biggest accounts.

• Use invoice finance only as a short-term bridge, while working on long-term fixes to get cash in faster.

Contracts & Negotiation

• Only agree to price cuts if the customer commits to guaranteed order volumes.

• Include “dual-sourcing” terms so you’re not locked into serving just one buyer with specialised tooling.

• Add clauses that give you notice periods or protections if a contract ends suddenly or if the buyer’s ownership changes.

30–60–90 Day Action Plan

First 30 Days

• Write down and publish a customer concentration rule (for example: no single customer should make up more than 20% of sales without approval).

• Start a weekly sales pipeline meeting that focuses on smaller and mid-size accounts, not just your biggest clients.

• Offer early-payment discounts to your top 10 late payers, and set clear credit limits for each customer based on their risk level.

Days 31–60

• Launch one new product or bundle aimed at mid-sized customers, and bring on one new sales partner (such as a distributor or reseller).

Days 61–90

• Win 3 new key customers from different industries so you’re not too dependent on one sector.

• Start putting customer concentration metrics (how much each client contributes to your sales) on page 1 of your monthly board report.

• Review your pricing against profit goals, and stop taking on custom work that isn’t profitable.

One last thought

A big customer can build you or own you.
Diversification it’s a valuation strategy, a covenant one and a sleep-at-night strategy.

Visit my website www.ellcadofinance.com