- 01 Oct
Mitigating The Risks Of Selling To One Major Debtor
When you land a major customer it can provide a huge boost to your business, increasing sales turnover and generating profits. However, there is another side to dealing with a major debtor, and that is the increased risk associated with your trade being concentrated into one customer.
The Risks Of Selling To One Major Customer
In a previous post I covered the risks of selling to a single major customer, often called a "prime debtor". These include:
Cash Flow Impact
Serious cash flow impact if they pay late - if a lot of your cash flow is received from a single customer, the impact of them failing to pay on time, or altering their payment pattern without warning, can be significant.
We have seen clients that have been close to insolvency due to large, well known companies failing to pay them for work that they have done. We have seen large customers disputing significant balances of debt, knowing that their small supplier will have no option but to negotiate and accept a settlement against the balance that is due.
You can try to mitigate this through good credit control or using a professional credit control service - however the potential for disputes can only be mitigated by having a tight paper trail that demands customer approvals.
Receivables Financing Restrictions
Funding restrictions - if you use a receivables financing facilities (to release cash from unpaid customer invoices), you may find that your funder imposes a prime debtor restrictions to limit the funding against significant customer on your ledger. These work by limiting the concentration that will be funded against any one customer.
Different providers will take different approaches to this, so you can mitigate this problem by comparing the approach taken by different invoice finance companies.
Turnover Loss Related Impacts
Loss of turnover if you lose the customer - it is good whilst it lasts, but the loss of a large customer can leave you with a number of business problems. Firstly, you may have neglected to develop other customers, so that you are reliant upon your sales to that one company. You may have geared up to handle it in terms of staff and resources. That resource may be difficult to redeploy, if you don't have enough other customers.
Spread your customer base as early as possible, perhaps considering some marketing support to help you attract new customers.
Exposure to a large bad debt should they fail - the worst situation of all. If the prime debtor fails, owing a significant balance of unpaid debt to you, you could suffer a significant bad debt. No one is immune from the possibility of failure as has been proven by the recent string of high profile names entering Administration and Liquidation - the latest of these big names being Thomas Cook, the 178 year old holiday company that failed last month. This demonstrates that you can no longer just rely on dealing with large, well known companies.
Options such as credit insurance and non recourse bad debt protection can help you mitigate this risk and possibly save you from taking a potentially survival threatening bad debt.