Three deals I've worked on in the last two years died at underwriting for the same reason. Not credit score, not collateral, not weak cash flow. The business had one customer — sometimes two — representing a lump of revenue large enough to make the lender nervous. The deals were otherwise clean. Good DSCR, experienced operators, reasonable loan-to-value. But concentration killed them anyway.
This is one of the quieter killers in small-business lending. It doesn't show up on a credit report. It doesn't trigger an automatic decline. It sits in the tax returns and the P&L as a perfectly normal line item, and then a sharp underwriter asks: "Who is Customer A on Schedule F?" And the conversation gets uncomfortable.
Here's what lenders are actually looking at, and how to get ahead of it before the file goes to credit.
What is customer concentration, and when does it become a problem?
Customer concentration is the percentage of total revenue attributable to a single buyer (or a small group of buyers). Most SBA lenders start paying attention when one customer exceeds 20% of revenue. At 25%, you'll get questions. At 30% or more, some lenders will require a specific mitigation strategy before they'll approve — and a few will pass on the deal entirely.
The SBA's own guidance (SOP 50 10 8) requires lenders to perform a complete credit analysis including a review of the borrower's customer and revenue diversification. That's not boilerplate. Preferred Lenders and SBA-supervised lenders take it seriously because the logic is straightforward: if that one customer leaves, the business's cash flow craters, and the loan goes sideways. The lender owns that risk.
The threshold isn't a hard rule. A manufacturer with a Fortune 500 anchor customer under a three-year supply agreement is a different story from a landscaping company whose revenue depends on one property management firm that could drop them next season. Context matters. But the concentration number is still the starting point.
How do underwriters actually measure it?
They're looking at two or three years of tax returns plus an interim P&L, and they'll compare revenue line items, 1099 issuances, or accounts-receivable aging schedules to identify who the big customers are. If the business uses accrual accounting, AR aging is often the most revealing document — you can see exactly what's owed, by whom, and how long it's been outstanding.
Some underwriters will also ask for a customer list sorted by revenue, which is reasonable to prepare in advance. If your client resists producing this (it happens), that resistance itself becomes a flag.
The math is simple: Customer A revenue ÷ Total Revenue = concentration percentage. But lenders will often also look at the trend. A customer who was 30% of revenue two years ago and is now 20% reads very differently from one growing from 15% to 25%. Direction matters.
What actually kills the deal versus what's manageable?
A few patterns that tend to close files fast:
- No written contract with the concentrated customer. If the relationship is entirely at-will — month-to-month, handshake deal, verbal pricing agreement — the lender has no basis for projecting that revenue forward.
- The customer is a related party. A borrower buying their employer's business who would also be the new company's biggest customer is a red flag layered on top of a red flag. Lenders will scrutinize the arm's-length nature of that arrangement hard.
- The customer is also in financial trouble. If the anchor customer is a distressed retailer, a company that recently filed for bankruptcy protection, or a municipality with publicized budget problems, underwriters will stress-test the scenario where that revenue disappears.
- The business can't articulate a recovery path. "We'd find new customers" is not an answer. A real answer involves pipeline, industry relationships, geographic markets, or capacity that can be redeployed.
What's manageable — with the right documentation — is a long-tenured relationship with a creditworthy customer, a contract that has years remaining, and a borrower who can show the history of renewal and the structural reasons the customer isn't going anywhere.
How do you structure around concentration risk?
The goal is to give the lender a reason to believe the revenue is durable, or to structure the loan so that its repayment doesn't wholly depend on it.
Get the contract in front of the underwriter early. If there's a master services agreement, supply agreement, or multi-year purchase commitment, produce it proactively. Don't wait for the lender to ask. A five-year exclusive supply agreement with a large, stable buyer changes the risk profile completely. The lender wants to see term, pricing, termination triggers, and renewal history.
Layer in a standby or earnout on acquisition deals. On a business acquisition where the buyer is aware of the concentration risk, a seller note structured with a standby provision — where payments to the seller are suspended if revenue from that key customer drops below a threshold — directly addresses the lender's downside scenario. Sellers don't love this. But it keeps deals alive that would otherwise die.
Consider whether the SBA 7(a) structure itself helps. A longer amortization (up to 10 years for working capital and equipment, 25 years for real estate) lowers the monthly DSCR requirement and gives the business more room to absorb a temporary revenue disruption. That's not a substitute for addressing the concentration, but it does mean the business doesn't have to replace every dollar of lost revenue to keep the loan current.
Size the loan conservatively. If the deal can be done at a lower loan amount — fewer acquisitions, less real estate, equipment only — the DSCR cushion grows. A deal that looks marginal at $2.5M might look fine at $1.8M. Sometimes the right move is to scope back to what the diversified revenue supports and revisit the rest in 18 months.
Document the customer relationship's history. Years of payment history, contracts renewed at better pricing, expansions of scope — these are the things that build a lender's confidence that the relationship is sticky. An LOI or letter of continued commitment from the customer, addressed to the borrower, can help. Some lenders will ask for it directly.
What should brokers and CPAs flag before the deal goes to a lender?
If you're a referral partner bringing deals to an SBA lender or a commercial bank, the worst outcome is a deal that dies three weeks into underwriting because nobody surfaced the concentration issue upfront. That wastes time, costs the client money, and creates a messy conversation with whoever ordered the appraisal.
Run through the last two to three years of the client's tax returns before you introduce the deal. Look for:
- Revenue concentration above 20% in a single customer or a small cluster
- Customer names that appear on both the revenue side and the owner's personal return (related party risk)
- Declining revenue that tracks a single customer's reduced orders
- An AR aging with one name dominating the 60- or 90-day bucket
If you find concentration, don't bury it. Come to the lender with the issue already framed and a mitigation story attached. Lenders will work harder on a deal where the broker has done this work. A surprise in credit committee is the version that gets declined.
The business with a concentrated customer isn't automatically unlendable. Some of the most profitable small companies in the country run on two or three deep, long-term client relationships. The question is whether the lender can get comfortable with the durability of those relationships — and that's a documentation problem, not an inherent credit problem. Most of the time.