A customer representing 25% of revenue deserves attention, but the percentage alone does not tell you the cash-flow risk. You need the customer's contribution, contract terms, payment behavior and the costs that remain if the relationship ends.
Start with the economic exposure
Consider a fictional business with $100 million of revenue, variable costs equal to 60% of sales and fixed costs of $20 million. EBITDA is $20 million. If a customer representing $10 million of sales is lost, and variable costs decline proportionately while fixed costs remain, EBITDA falls to $16 million.
A 10% sales loss has produced a 20% earnings decline. If some supposedly variable costs are committed for several months, the near-term cash effect could be worse. If the lost customer had unusually low margins, the aggregate cost ratio could overstate the earnings effect.
The analysis should follow the actual economics instead of applying the same margin to every customer by default.
Ask for evidence that changes the case
| Diligence area | Question |
|---|---|
| Contract | Can the customer terminate, reduce volume or renegotiate price? |
| Margin | What direct costs and service requirements belong to the account? |
| Timing | When is the next renewal or purchasing decision? |
| Cash | Are invoices current, disputed or unusually slow? |
| Replacement | Can capacity be redeployed, and at what cost? |
A long relationship is useful context but does not guarantee renewal. A signed contract may protect some cash flows while leaving volumes or service obligations uncertain. Read the relevant terms rather than summarizing the relationship with a single adjective.
Build a connected downside
Model lost revenue, avoidable costs, stranded costs, collection delays and any restructuring payments. Then flow the result through interest, scheduled principal and minimum cash. A revenue haircut that never reaches the cash schedule is not a complete lender downside.
Separate evidence from judgment. If you assume half the lost revenue can be replaced within six months, identify why that timing is plausible and show an alternative if replacement takes longer.
Put the result in the memo
The conclusion might be that the proposed debt requires a contract renewal before approval, a smaller amount, more usable liquidity or further diligence. The appropriate response depends on the business and terms; concentration is not an automatic decline rule.
Use the credit memo guide to state the recommendation and conditions. The underwriting workbook includes original cases linking business risk to cash, covenants and recovery. For oral practice, keep the existing private-credit interview questions alongside your model.
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