For many small and medium businesses, the milestone of landing a major customer feels like a turning point. The contract is large, the relationship is prestigious, and the revenue is transformative. The credit risk that comes with it is rarely discussed at the same table. When a customer represents 30%, 40% or more of your total revenue, their financial health is inseparable from yours.
What concentration risk actually means
Concentration risk in accounts receivable is the exposure that arises when a significant proportion of your receivables is owed by a single entity or a small group of related entities. The problem is asymmetric: the customer's insolvency does not merely affect one invoice — it wipes out a disproportionate share of your total debtors ledger at once. If that customer represents 40% of your revenue and goes into liquidation owing you six months of invoices, the damage may not be survivable.
Setting a credit limit
Every customer — regardless of size or prestige — should have a credit limit. The credit limit should be set based on what your business can absorb if the full amount is lost, not on what the customer wants to purchase. A credit limit of $50,000 on a customer who wants to purchase $500,000 per month sounds conservative; it is in fact a signal that the relationship structure needs rethinking.
Review credit limits annually and when the customer's circumstances change — new ownership, restructuring, publicly reported financial difficulties, or a change in payment behaviour.
PPSR registration
If you supply goods, register a purchase money security interest (PMSI) on the Personal Property Securities Register (PPSR) before delivery. For a major customer, this registration is not optional — it is the difference between recovering the goods in an insolvency and standing in line as an unsecured creditor.
Trade credit insurance
Trade credit insurance covers receivables against the risk of a debtor's insolvency or protracted default. It is available for individual large accounts as well as whole-of-ledger coverage. For a business with concentration risk, a single-buyer policy over the major customer may be the most cost-effective way to protect the exposure without limiting the commercial relationship.
Early warning signals
Monitor your major customer's payment behaviour closely. A customer who has always paid at day 25 and suddenly starts paying at day 45 is telling you something. Other signals include requests for extended terms, changes in order volume, management or ownership changes, and publicly available information such as ASIC filings or court judgments.
The conversation you need to have
Diversification is the structural solution to concentration risk — but it takes time. While you are building it, the practical answer is better documentation, tighter credit limits, PPSR registration and monitoring. If your largest customer is materially larger than your second-largest, that is the conversation to have with your accountant and your credit manager now — not after the call comes. Speak to Merion if you are managing significant concentration exposure.