Concentration Limit
A concentration limit is a cap, set in a credit or factoring agreement, on how much of the borrowing base a single debtor (or related group of debtors) may represent. Balances above the cap are treated as ineligible and excluded from the collateral that supports availability.
Why Lenders Impose Concentration Limits
A borrowing base made up of receivables from many independent debtors is more resilient than one dominated by a single payer. If one debtor represents half of a borrower's eligible accounts receivable and that debtor stops paying, disputes a large balance, or files for bankruptcy, the lender's entire collateral position can deteriorate at once. The concentration limit exists to prevent that single point of failure. It forces diversification into the eligibility math so that no one debtor's payment behavior can dictate the value of the whole facility.
The same logic applies in both asset-based lending and factoring. In ABL, the limit protects the lender's recovery in a liquidation scenario. In factoring, where the factor is buying or advancing against specific invoices, concentration discipline protects against over-reliance on one account debtor whose creditworthiness drives most of the portfolio's risk.
How the Cap Is Expressed
Concentration is almost always stated as a percentage of total eligible receivables, applied to each debtor. A common structure sets a single blanket limit (for example, no debtor may exceed a fixed percentage of the eligible pool), with the portion above that threshold deemed ineligible. The excess is excluded before the advance rate is applied; the debtor's balance under the cap usually remains eligible.
Typical levels range from roughly 10% to 25% per debtor, with the exact figure driven by industry, debtor credit quality, and the granularity of the borrower's customer base. Stronger, investment-grade or government debtors sometimes receive a higher limit, or a debtor-specific carve-out, because their default risk is lower. Weaker or unrated debtors may carry a tighter cap. Some agreements also apply an aggregate or tiered limit covering the top several debtors combined, not just each one individually.
Effect on the Borrowing Base and Availability
Concentration limits work as a form of ineligibility. The mechanism is the same as any other eligibility exclusion: the over-limit amount is stripped out of the eligible pool before the advance rate applies, so it reduces availability dollar for dollar on an eligibility basis.
Consider a borrower with $10,000,000 in eligible AR, a 20% concentration limit, and one debtor that owes $3,000,000. The cap on that debtor is $2,000,000 (20% of $10,000,000), so $1,000,000 is concentration ineligible. The eligible pool falls to $9,000,000. At an 85% advance rate, availability is about $7,650,000 instead of the $8,500,000 the gross figure might suggest.
| Item | Amount |
|---|
| Total eligible AR (gross) | $10,000,000 |
| Largest debtor balance | $3,000,000 |
| Concentration cap (20%) | $2,000,000 |
| Over-limit ineligible | $1,000,000 |
| Adjusted eligible AR | $9,000,000 |
| Availability at 85% advance rate | $7,650,000 |
Because the cap is set as a percentage of the eligible pool, it can move with the pool itself. As other receivables age out or are excluded for unrelated reasons, the dollar value of the cap shrinks, which can push more of a large debtor's balance into ineligible territory. This is why a borrower can see availability tighten even when a key customer's balance has not changed.
Practical Considerations
Concentration limits interact with the rest of the eligibility framework, including aging and cross-aging rules, contra accounts, and dilution. A debtor can be partly ineligible for several reasons at once, and lenders generally avoid double-counting the same dollar across overlapping tests. Borrowers with a naturally concentrated customer base (common in industries with a few large buyers) should negotiate the limit and any debtor-specific carve-outs at term-sheet stage, since it directly governs how much borrowing capacity their real receivables will produce.
For lenders, monitoring concentration over time is as important as setting it. A rising share for one debtor can be an early signal of customer dependence or shifting credit risk, and it is one of the items reviewed in field examinations and ongoing portfolio monitoring. Accurate, current AR data is what makes the calculation trustworthy. Platforms such as Zolvo help lenders verify receivables and keep concentration and other eligibility tests reconciled against live debtor data.