When one buyer is most of the book

Concentration is not a risk that waits for a failure

Steinmark Home is 54.0% of Zohairy's turnover. Everybody in the building knows this, and everybody describes it the same way: if Steinmark ever went, we would be in trouble. That is true, and it is the least useful thing about it, because it treats concentration as a disaster that has not happened yet.

Concentration bills you every month, through two clauses that are already signed.

The clause that funds you less than you assigned

Lindengate's factoring agreement contains a concentration cap: no single debtor is funded above 35% of the assigned ledger. It is one line in a schedule, and Zohairy's finance manager read it as standard wording.

On 30 April the assigned ledger stood at USD 1,240,000. Steinmark was USD 712,400 of it, which is 57.5%.

USD 236,640 of cash Zohairy had planned to have, gone, in a line called concentration adjustment that nobody had ever had to read before. No default. No dispute. No late payment. The buyer is paying perfectly well. The facility simply refuses to lend that much against one name.

The cap is not Lindengate being difficult. Lindengate has the same problem one level up. A lender's own supervisors cap how much exposure it may run to a single counterparty, as a share of its own capital. That is the point of the Basel large-exposures framework. Your concentration cap is your financier's concentration cap, passed down to you. So you cannot negotiate it away by being a good customer.

The way out, and it is not the obvious one

The obvious response is to ask Lindengate to raise the cap. It will not, for the reason above.

Look at the arithmetic instead. To fund the whole USD 712,400 at a 35% cap, the assigned ledger would have to be USD 2,035,429. That means USD 795,429 more of other buyers' invoices in the same facility.

Read that again, because it is the useful sentence in this lesson. The cheapest way to get USD 236,640 more cash out of a facility you already have is to win a second buyer. Not a bigger limit. Not a cheaper rate. Not a new bank. A second customer, whose invoices raise the total and unlock funding on the first one.

Spreading your customers is usually argued for as prudence. That is easy to nod at and easy to postpone. Here it is a funding line with a number on it, and it competes directly with every other way of raising the same cash.

The day the limit was cut

6 May. Crossfell writes to say that Steinmark has been downgraded, so it is reducing the limit from USD 450,000 to USD 150,000. The cut applies to goods shipped from today. Goods already shipped stay covered on the old limit.

Nothing has gone wrong. Steinmark has paid every invoice, this year and last. What has happened is that Crossfell has changed its mind. Crossfell insures hundreds of sellers into this buyer and sees how it pays all of them. And it has told Zohairy for free.

A withdrawn limit is the cheapest credit report a factory will ever receive. It is the opinion of an institution that knows more about your customer than you do, and that has to back the opinion with its own money. Treat it as news, not as an administrative nuisance.

Then deal with what is on the floor. Purchase order SMK-7802 — 22,000 robes, USD 321,200 — is cut and 61% sewn, shipping 3 June. April's shipment has already used up the remaining USD 150,000 of limit. So this one would sail with no cover at all.

Holding is the option that feels safe and costs the most. Storage at USD 0.06 a robe a week is USD 5,280 over four weeks. And Steinmark's terms deduct 2.0% of the order value for every completed week late, capped at 8.0%, which is USD 25,696. Total USD 30,976. At the end of it Zohairy owns 22,000 unsold bathrobes.

The third option is a conversation. Steinmark will open a sight documentary credit for this one shipment if Zohairy carries the cost. It wants 1.2% off the price to cover its bank's charges and the trouble, which is USD 3,854.40. That is eight times cheaper than holding the goods. And unlike holding, it removes the risk instead of postponing it. Course 13.2 covers reading the credit that then arrives. Course 13.7 covers the standby alternative. Course 16.4 covers how the conversation is conducted.

Write the number down before you need it

A concentration policy is one sentence with a figure in it: no buyer above a stated share of turnover without board approval, reviewed every quarter. Zohairy did not have one. That is why 54.0% happened without a single decision being taken to allow it. Each order was good. Each order was correct. The sum of them was a structural position nobody chose.

Act as a credit manager for a garment exporter. I want my shipping plan read against my credit limits and my funding caps, so that any collision is found before it happens rather than after. My facts: currency [CURRENCY], total annual turnover [AMOUNT], and for each buyer: name, expected turnover, payment terms in days, the number of days they ACTUALLY take, the insured credit limit I hold, and the amount currently outstanding [LIST THEM]. My policy terms: insured percentage [PERCENT], discretionary limit [AMOUNT] and its conditions, maximum extension period [DAYS], overdue notification period [DAYS], and every exclusion [LIST]. My financing facility: advance rate [PERCENT], concentration cap per debtor [PERCENT OF WHAT], and total assigned ledger today [AMOUNT]. My shipping plan for the next six months: [BUYER, SHIP DATE, INVOICE VALUE, PER LINE]. Do the following. First, build a running outstanding balance per buyer across the plan. Show the balance on the day of each shipment and on each due date. Mark every date on which the balance goes past the insured limit, and give me the uninsured amount at each peak. Second, do the same against the concentration cap. Tell me the funding I will actually have available, not the funding the advance rate implies. Third, for every collision, give me four priced options: apply for a higher limit, resequence the shipments, ship the excess against a documentary credit or standby, or ship uninsured knowingly. Give a cost and a lead time for each. Fourth, tell me how much OTHER turnover I would have to assign to release the funding the concentration cap is holding back. Fifth, list every action that would breach my policy conditions if I took it without telling the insurer: granting extra time, agreeing a settlement, issuing a credit note, stopping shipments. Sixth, name the single change to my process that would stop this kind of problem happening again, and be specific about which column goes on which report. Do not reassure me. If a shipment is uninsured, say so plainly, with the amount.