May 14, 2020

Prioritize mitigating credit risk, especially during economic uncertainty


Freight brokers and commercial fleets process hundreds if not thousands of shipments daily. In an industry characterized by a huge amount of transactions, risk must consistently be weighed against reward. While most transportation companies diligently assess the profitability of each load before inking the deal, even the most thorough risk management practices cannot mitigate each and every risk.

Many companies fall victim to the ever-present threat of late payments and payment defaults. These often unexpected liabilities can strike without warning – especially during times of economic hardship like the COVID-19 pandemic. A pattern of non-payments can quickly hinder your company’s ability to grow. Worse, if not handled properly, defaults can ultimately shut down your fleet.

Research shows that 20% of bankruptcies among small and medium-sized businesses occur due to customers that default on their invoices. That is why it’s important for any business to explore credit risk mitigation solutions as a means to protect itself from the pitfalls of irrevocable debt.

Credit insurance protects against losses from non-payment of commercial trade debt and gives a policyholder assurance that it will receive payment for non-disputed accounts receivable from either the debtor or the trade credit insurer within the terms of the policy. Credit insurance allows companies to reliably manage the commercial and political risks of trade that are beyond their control.

At the moment, it seems COVID-19 is beyond everyone’s control as the economic downturn has disrupted a variety of truckload sectors, leaving many industries to grapple with kinks in the supply chain. Truckers normally reliant on the steady volume of certain industries like automobile manufacturing find themselves at a greater risk of falling victim to payment defaults than other sectors as load availability remains low in the market.

“Shippers could be directly affected by industries in which major shutdowns have occurred, said Jamie Cannon, Reliance Partners’ director of marketing. “Defaults pose a threat to those directly affected by industries that have lost consumer confidence as well as those that are experiencing slowdowns due to a lack of supply as well as supply chain delays.”

In a recent “Passport Research” article, FreightWaves predicts that the next two quarters for transportation companies will be characterized by rising bad debts, defaults, increasingly drawn down revolvers and withdrawn guidance from public companies due to a lack of visibility.

“Fleets should consider evaluating their risk and the benefits of coverage, especially if they have direct lanes with shippers and have outstanding invoices that are hurting their own cash flow,” Cannon said.

Not only does credit insurance allow companies to mitigate risks beyond their control and protect against non-payments, that same credit insurance also allows companies to explore growth opportunities with existing customers. Insured companies can sell on open account terms where they may have previously been restrictive or only sold on a secured basis.

“Credit insurance can help with unpaid invoices and also help insureds with sales growth by taking on risks they wouldn’t have previously considered,” Cannon said. “Most people do not know, however, that credit Insurance can also allow for insureds to borrow against export receivables and allow more capital at reduced rates by taking advantage of an accounts receivable reduction in bad debt.”

According to Cannon, commercial fleets can enjoy the benefits of comprehensive credit function support, safer sales growth, thorough customer insights and risk information, as well as financial peace of mind through credit insurance coverage.

Buzzwords like “transparency” and “efficiency” are generally associated with freight-tech innovations, but why not apply these terms to your billing processes as well? Transportation companies can improve their customer credit management by clearly documenting the terms and conditions of each contract and by issuing bills immediately after completing each haul. Most importantly, a thorough investigation of each shipper, carrier, etc. should be carried out before any agreement is made.

Cannon noted that although freight brokers tend to utilize credit insurance more often than commercial motor carriers, she urges more fleets to reevaluate their financial strategies by considering a credit insurance policy, especially during this volatile recessionary economic period.

Credit insurance indemnifies policyholders’ receivables from credit risks often unforeseen. While the transportation industry reels from a downturn in the economy, freight brokers and commercial fleets should turn to their insurance providers for credit solutions before the unexpected happens.

“Reliance Partners can provide a free risk assessment that will include coverage estimates and insights into risks in the insured’s industry,” Cannon explained.

To learn more about the ways in which credit insurance can protect your company against losses from non-payments and defaults, reach out to Reliance Partners for more information on mitigating credit risk.