Lenders Do Not Always Say No to Concentration. They Just Lend Less.

A strong EBITDA figure can conceal a fragile business if one customer, supplier or logistics route cannot be replaced quickly. The lenders examined in this report respond by reducing debt capacity or demanding structural protections, unless the borrower can evidence durable contracts, alternatives and liquidity.

A business can report $5 million of EBITDA and still be worth materially less to a lender than its seller expects.

That was the uncomfortable arithmetic described by Glacier Lake Partners, a US advisory firm focused on middle-market acquisition financing. Its example was simple enough to make a buyer wince: one customer accounted for 30% of revenue. The business had profits. It had a deal. Yet, without credible protection around that relationship, the lender could reduce the advance rate and haircut earnings, cutting senior debt capacity by as much as $4 million to $6 million.

That is not an operational footnote. It is the difference between a buyer funding an acquisition with debt and having to find a much larger equity cheque.

Most owners would call this a customer-concentration issue. Supply-chain teams would recognise its mirror image immediately: a sole supplier, a single shipping lane, a piece of irreplaceable tooling, or a relationship that belongs to the owner rather than the company. The labels differ. The lender’s question does not.

If this link breaks, how much cash disappears, how fast, and who absorbs the loss?

The myth: EBITDA is the answer

The conventional view of acquisition finance is neat. Lenders start with EBITDA, meaning earnings before interest, tax, depreciation and amortisation, a rough measure of operating profit. They look at assets that can support borrowing. They examine historic customer retention. Then they decide how much debt the company can carry.

Supply-chain risk, in that story, belongs to the post-closing to-do list. Management can dual-source later. It can carry more stock. It can find another freight route. The deal team has more pressing matters.

That division is increasingly misleading.

A lender is not really lending against last year’s earnings. It is lending against the chance that future cash flow remains available to repay it. A concentration exposure is dangerous not because it looks untidy in a diligence report, but because it can make apparently recurring profit vanish before management has time to improvise.

Here is the twist: concentration often does not cause lenders to say no. It causes them to say, “Fine. But with less debt, more equity and more protection.”

CT Acquisitions, a US middle-market acquisition adviser, reported in its 2026 update that unitranche lenders, meaning lenders providing one combined senior-and-junior debt facility, can reduce leverage by 0.5 times EBITDA when a single customer exceeds 20% of revenue. In an illustrative deal expected to borrow 5.0 times EBITDA, that means 4.5 times instead.

Half a turn sounds small. It is not small to the buyer who must now fund the gap.

Houston. Photo: Jim Evans / Wikimedia Commons, CC BY-SA 4.0.

The haircut is not about one customer

The Glacier Lake example is useful because it exposes what the headline number hides. A customer representing 30% of revenue does not automatically make a company unfinanceable. A customer that can leave tomorrow, without a transferable contract or an established replacement path, is another matter.

This is where most people stop looking. They see the 30% and argue about whether it is above or below some supposedly fatal threshold. Credit committees are asking a more practical set of questions.

How long has that customer been buying? Is there a written contract, or merely a reassuring history of repeat orders? Does the agreement survive a change of ownership? Is the relationship held by the company and its team, or by the departing owner personally? What happens to cash available for debt payments if that customer halves its orders or disappears entirely?

Exactly the same logic applies on the supply side. Do you know where a supplier gets its supplies? Do you know its suppliers’ suppliers? If a single source fails, what is the qualification timeline for an alternative? Can production continue from inventory while that alternative is approved? Is a second supplier genuinely approved, or merely a name in a procurement presentation?

The research brief makes an important distinction that deal marketing often blurs. Customer-concentration haircuts are directly evidenced in the cited acquisition-finance cases. Supplier and logistics-lane concentration are part of the same cash-flow underwriting logic, but the brief does not provide a named deal in which a lender publicly imposed a specific supplier or freight-lane haircut.

That does not weaken the lesson. It sharpens it. Do not claim that a generic supply-chain risk has already been solved because somebody has labelled it “manageable”. Show the lender why the interruption cannot stop cash flow.

GI Network's view: A concentration percentage is not a credit conclusion. It is the opening question in a durability investigation: how exposed are you, how long would substitution take, what transfers with the business, and can liquidity bridge the gap?

Why $500,000 can become $2 million

PitchBook, the market-data publisher, and FOCUS Investment Banking, a US middle-market adviser, offered a blunt illustration in their 2024 private-credit review. A customer loss that reduces a business by $500,000 can result in a $2 million haircut to the total purchase price.

At first glance, that looks excessive. Why should a buyer discount four times the immediate loss?

Because the buyer is not buying a year of profit. It is buying a stream of future cash flows. The missing $500,000 may also reveal a weak contract, a concentrated sales model, a departing owner’s personal relationship, reduced purchasing power, or a business whose other customers now look less secure. The lost account is evidence about the quality of all the earnings.

This is the mental jump founders and sponsors often miss. Lenders are not punishing concentration as a moral failing. They are asking whether reported EBITDA is durable enough to be converted into debt capacity.

Midas Partners, an acquisition-finance adviser, made the same point in September 2026 from another angle. Concentration rarely kills a deal outright, it said, but it shapes the structure through downside tests, larger equity cushions, earnouts or seller notes. An earnout is deferred purchase consideration paid only if agreed performance is achieved. A seller note is debt the seller leaves in the business rather than receiving all cash at closing.

In plain English, the risk does not disappear. It moves to the party best able, or most willing, to carry it.

The business that made diversification financeable

There is a more encouraging version of this story in Houston.

In November 2025, Texas Capital Bank closed a $2.3 million SBA 7(a) loan, a US government-backed small-business loan, for a borrower acquiring a competitor’s assets. The point was not merely expansion. The acquisition reduced customer concentration, improved the borrower’s credit profile and supported growth.

The crucial decision was framing diversification as the reason to lend, rather than as a future operational aspiration.

That matters for operators. Too many acquisition proposals present risk reduction as a pleasant side benefit: after closing, the combined company should have a broader customer base. Texas Capital Bank’s case shows the stronger version. The transaction itself changed the risk profile in a way the lender could understand.

The interesting part is that concentration was no longer simply a reason to lend less. A credible plan to reduce it became part of the financing case.

There is a second route when operating concentration cannot be removed quickly. Haversine Funding, a US financing firm, participated in a $15 million asset-based lending facility for a mid-market consumer-products business. Asset-based lending means debt secured against working assets such as receivables and inventory. The participation spread single-name and asset-concentration exposure across lenders.

The company did not need to pretend that concentration had vanished. The financing structure allocated it differently.

Haversine Funding. Photo: Pixabay / Pexels, Pexels licence (free commercial use).

Put the Texas Capital and Haversine cases beside Glacier Lake and a pattern appears that none of the individual reports quite states outright. Concentration is not one risk with one cure. It is a cash-flow fragility that can be addressed at three levels: change the commercial base, prove operational resilience, or redesign who carries the exposure.

That is why a supplier backup plan, a customer contract and an inventory facility belong in the same investment-committee conversation. They may solve different parts of the same underwriting problem.

When a sponsor can change the answer

The evidence does not say that every concentrated business deserves a punitive structure.

A 2023 Federal Reserve paper found that lenders cut commitments by about 32% for borrowers generally after a covenant violation, but by about 17.4% for private-equity-backed borrowers. A covenant is a condition in a loan agreement that requires the borrower to maintain agreed financial standards.

Sponsor backing can therefore soften a lender’s response. It can bring capital, governance and a credible capacity to intervene. But it is not a substitute for evidence. A sponsor can provide a cushion. It cannot make an unassignable contract transferable, qualify a new supplier overnight or make a single shipping route reliable.

Nor does the evidence support a universal 20% rule. That figure appears in the Glacier Lake and CT Acquisitions examples, but the real question is substitutability. A 30% customer on a long, transferable contract with a deep operating relationship may be safer than a 12% customer attached to the owner’s mobile phone.

The same is true in supply chains. One supplier may be tolerable if alternatives are qualified, stock cover is real and contracts preserve supply. Three suppliers may still be dangerous if they depend on the same upstream bottleneck.

What businesses should bring to the lender

Do not arrive with a slide saying “dual sourcing under way”. That is management language. Turn it into underwriting evidence.

First, map exposure in cash terms. Show revenue or spend by customer, supplier and lane. Then translate disruption into cash: if a major customer reduces orders, a supplier stops delivery or a route closes, what happens to revenue, margin, working capital volatility and the ability to pay debt?

Second, measure time. Document supplier lead times, alternative-source qualification periods, inventory cover and historic disruption performance. A lender can work with a disruption if it sees how the company survives the interval before replacement supply or revenue arrives.

Third, check ownership transfer. Review customer and supplier contracts for assignment and change-of-control provisions. A relationship that cannot legally transfer is not fully part of the asset being sold. Nor is revenue that depends chiefly on an owner-operator who will leave.

Finally, convert mitigations into binding commitments where possible. Inventory policies, price-adjustment clauses, supplier agreements and formal alternative-routing arrangements are more persuasive than assurances. The same principle applies to the data room: evidence changes the meeting, not the existence of a folder. Our analysis of how investors read a pitch deck reaches a similar conclusion from the equity side.

For a buyer, the practical outcome may be a revised purchase price, a seller note, an earnout or more equity. None is glamorous. All may be cheaper than discovering after closing that the target’s EBITDA was an estimate of a world that no longer exists.

What experienced investors see first

Private-credit diligence is partly an exercise in distrust of smooth averages. Historic retention can be real and still fail to answer whether it survives a sale. A stable supplier relationship can be real and still conceal single-source tooling or a dependent upstream supplier.

Experienced investors therefore run the ugly scenario early. What does cash flow look like if the concentrated customer is cut in half? If the key supplier slips? If inventory must be built before an alternative is qualified? Would the company still have enough liquidity to meet its obligations without breaking its covenant?

They also separate operational fixes from financeable fixes. A procurement team may correctly believe that a second source can be developed. The lender wants the qualification timetable, the cost, the contractual rights, the inventory bridge and the downside model. That is not pedantry. It is the difference between a plan and a repayment case.

It echoes the lesson in GI Network’s examination of refinancing risk and debt capacity: the limiting factor is often not the headline ratio but the event that makes that ratio suddenly irrelevant.

The four-question durability test

GI Network would approach this situation before outreach by building a concentration map that links commercial exposure to cash flow, reviewing whether contracts and relationships transfer at closing, testing disruption scenarios against liquidity, and identifying which mitigations can become documentary proof. We would then use that evidence to align the deal structure with the likely lender response, whether that means reduced leverage, additional equity, seller support, an asset-based facility or a blended solution.

Before you decide that concentration is “manageable”, use the Durability Four:

1. 1.Exposure: How much revenue, supply or freight capacity depends on the relationship?
2. 2.Substitution: How long would it take to replace it in reality, including approval and ramp-up?
3. 3.Transfer: Do the contracts, permissions and relationships survive a sale of the business?
4. 4.Bridge: Is there enough inventory and liquidity to absorb the disruption while replacement happens?

Answer those four questions with documents and data, not confidence, and concentration may remain a risk without becoming a debt haircut. Fail them, and the lender will still finance the business sometimes.

Just not the business you thought you were buying.