Don't Concentrate!

By: Ken Walsleben
Date: 5/1/2008

No, I'm not speaking of mental concentration, I always encourage that! I'm referring to client concentration, which is something to really be avoided.

By the way, have you noticed that most every business article these days begins with concerns for our national economic picture, and the doom-n-gloom of epic financial challenges? To maintain my credibility as a financial columnist, I've now just made reference to it, so I suspect I'm still in the good graces of the business media!

However, my advice concerning client concentrations holds true regardless of the economic challenges of any given moment in time. Especially in today's trying times (there, I did it again!) you must insulate your business from the credit concerns of others. I've seen staffing companies severely rocked and even fail over the payment default of a single client.

Understandably, leading up to that terrible event, those staffing firms just continued to book more and more business with their valued clients. It's just human nature. After all, it's against our DNA to say 'no' to more business, isn't it? I certainly understand how their situation arose, but nonetheless, the financial failure of a large client can sink your business too. To those who have suffered such a fate, I tip my hat in condolence. But I want to scream that it didn't need to be that way! A lesson can and should be learned from their experience.

Those unfortunate staffing firms learned that when you have proper client diversification, you have many different customers to whom you are a creditor. Conversely, if you have poor client diversification, when trouble arises, you'll find that you don't have a client/creditor relationship. Instead, you find that you have a literal partner upon whom you are completely dependent, and whose actions you can rarely control. Your mutual futures are hopelessly intertwined and you have now lost. The only question that remains is how much. You'll likely find that you have to keep providing continued service or they'll fail and leave you completely unpaid. You'll worry that you're throwing good money after bad. Obviously, this is a nightmare to be avoided.

So how can you continue to say 'yes' to new additional business (thereby keeping your DNA in proper alignment) while still being able to sleep at night? Two ideas spring to mind. Each involves the transfer of payment risk to another party.

You can either purchase a credit insurance policy from a reputable provider (there are about 5 large specialty insurers worldwide), or you can utilize the services of a non-recourse factoring company. The credit insurance route is a viable option if (1) you don't also need funding, and (2) you are comfortable with record keeping and monthly submissions of data to the insurer, and (3) if you can survive the annual policy loss deductible. Each insurer also has minimum annual premiums that you'll have to pay. Depending upon your needs, these minimum premium levels may prove cost ineffective for you.

Alternatively, if you align with a non-recourse factor, the factor will take on the risk of credit default and by using their funding mechanisms, you'll have the best of both worlds. It gets better yet if you avail yourself of a non-recourse factor who doesn't impose minimum fees or term agreements. Such an arrangement will give you the same or better protections of a credit insurance policy, but at lesser cost, little or no deductible, and with incremental funding!

All too often, factors are simply viewed as a necessary cost of doing business. You may mistakenly consider them all to be alike. However, as I've just demonstrated, they can be a business-saver. Because factors can absorb your risk of non-payment, and because they provide you with credit guidance before a problem arises, they can literally save your livelihood. Due to their presence, you can literally keep on saying 'yes' to new incremental business and sleep comfortably at night. If your firm has client concentrations of more than 20% to any single customer, you owe it to yourself to chat with a non-recourse factor.

Don't say I didn't warn you. Especially in these trying economic times!

Ken Walsleben is the Principal and Co-Owner of The Hamilton Group. He can be contacted at 800.351.3066 or by email at ken@hamiltongroup.net