Why Client Diversification is So Important

Posted on 13.01.2014, by Rob Warlow

When reviewing your finance request the bank is looking to identify the various risks which could cause your business to fail or at least struggle.

There are a number of risks which banks are on the hunt for but one such risk is client concentration; is your business overly dependent on one or two clients?

A disproportionate reliance in terms of turnover on one client can prove fatal if they fail to pay what’s due or, even worse, close down altogether.

If a large portion of your sales turnover does depend on one or two clients then the bank will see this as a key risk (as should you). If you are in this position the bank will be looking for an answer to this question,

“If this key client fails, what impact will this have on repayment of our loan?”

The importance of investigating this risk, and understanding the impact it can have on a business, is highlighted in a recent company failure.

A company operated a three-star hotel just outside Cardiff Wales International Airport in South Wales.

The hotel’s primary source of income came from the company operating the airport car parking facility. The company offered the airport users a package deal comprising of car parking and hotel accommodation. An ideal win-win for both the hotel and the car parking provider

Unfortunately the car parking company closed the facility in January 2013 and very quickly the hotel started to suffer due to this dramatic loss in business. The reason for this was that the arrangement constituted a large portion of the hotel’s turnover.

The end result was the company running the hotel was placed into Administration in November 2013 with lenders and other creditors facing a significant loss.

A salutary lesson as to why you should never build a business on a thin client base; the risks are too high and if you are looking for finance the bank will be less willing to support you.

Client diversification is the key.

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