4 Ways to Innovate With Trade Credit Insurance

When you hear the word innovate, your mind may first go to technology and software—AI or transportation management systems, perhaps—not to a niche business insurance product with origins in the late nineteenth century.

However, trade credit insurance (TCI) is an often misunderstood or underutilized line of coverage that can be leveraged as a multifaceted tool in the 3PL industry. If you’ve heard of it, you may know that it protects one of your largest (and most vulnerable) assets—your accounts receivable (AR)—against slow pay, no pay, and bankruptcy. But there are many more benefits to the program than that.

Trade credit insurance was invented to facilitate trade and commerce. Over the years, the product has evolved with shifting markets, boom and bust commodity cycles, and political realities, helping resourceful businesses rise to meet the next new challenge. The same is true today. Let’s look at four ways trade credit insurance can smooth the road ahead for your 3PL.

There is a reason trade credit insurance is often referred to as “sleep insurance.” One of its key functions is to strengthen your balance sheet and protect cash flow by insuring against bad debt loss. It provides a formal risk mitigation strategy that covers most of your open sales—so you never have to lay awake at night, worrying about whether that customer is going to pay you.

This is particularly advantageous in the 3PL space because brokerages tend to be AR-heavy with a wide customer base, which means lots of credit exposure.

Right now, many 3PLs are simply owning all that risk. Sure, you can mitigate by setting aside a bad debt reserve, but those are typically based on historical losses and do not predict future losses. Additionally, they are often a small percentage of open AR and may not sufficiently cover a large or unexpected loss.

During the logistics process, the shipment is insured throughout each stage until the 3PL goes to invoice—and this is when the 3PL’s exposure is at its highest value. Other risk mitigation strategies tend to fall short here, but this is where TCI shines: it transforms the AR from a promise to pay into a collateralized asset.

If a customer is slow to pay, doesn’t pay, or files for bankruptcy, a TCI policy can quickly kick in to handle collections and then pay out in the event the covered debt is not collectible promptly. In other words, TCI will put a hard cap on any potential loss. No covered default payment, bankruptcy, or change in a customer’s financial situation is going to ruin your cash flow or prevent you from paying partners and employees on time.

The world of third-party logistics is extremely fast-paced, and speed to market is key because any hesitation can lead to a lost load. As such, efficiency and accuracy are crucial when trying to verify a potential customer’s identity and establish their creditworthiness—especially as fraud schemes become increasingly insidious. You want to work with customers that are as trustworthy as you are. One way to do this is through credit verifications—established credit and strong credit are signs of legitimate partners.

In the past, this verification has been done in-house—putting the administrative burden on the 3PL to call for references, check mercantile reports, and ultimately make an educated guess on a potential customer’s ability to pay. Many small and medium 3PLs may have limited resources, but vetting risk is difficult for any company. Everyone’s looking for better information, and an effective TCI carrier can give you instant access to the highest quality information available.

The best TCI carriers have vast resources to share: they allow you to tap into their robust database and leverage their team of experts for support that can either help you strengthen your current credit process or implement a formal and disciplined credit management process. They also help you assess the credit of prospective partners—including separating legitimate customers from illegitimate ones—and formally monitor the credit of active accounts.

After all, you’re not in the business of making credit determinations. You’re in the business of brokering freight. When you offload the credit function to a team of experts whose sole job is to collect and assess financial information, you have more time to focus on growing your business. Which brings me to my third point.

Logistics is a quick—often risky—business. A freight company may be on the phone with a new customer who says, “Hey, I’ve got this load for you, and I need it moved today.” Perhaps it’s late on a Friday, and there’s not much time to make the decision. A typical freight company has two options:

    1. They can play it safe. This might mean taking the time to assess the customer’s credit, which risks losing the load; or setting restrictive credit limits, which slows growth.

    2. They can be aggressive. This means booking the load without accurately establishing a credit limit or conducting a thorough assessment—opening the company up to risk.

Trade credit insurance gives 3PLs the best of both worlds: a safe and aggressive approach.

With trade credit insurance, you can quickly get answers about creditworthiness—often within minutes—and extend maximum credit terms to new customers, knowing your AR is protected. This reduces the friction between sales and credit, allowing you to safely maximize each sales opportunity.

Because accounts receivable is one of a 3PL’s largest assets, it is often leveraged to secure financing through a bank or factor. If you are leveraging your AR to gain access to working capital, trade credit insurance can be a cost-effective way to enhance your borrowing base and gain additional availability on receivables that are otherwise discounted, or excluded, by the lender.

When you pledge your AR as collateral, the lender makes a calculation that determines what percentage it will advance on your open balance, but there are often many caveats that limit their advance rate. The lender may exclude or restrict certain receivables based on concentration, extended terms and slow pay, and export sales, which reduces the amount you can borrow.

But a TCI policy means your AR are insured assets—which means they are less risky for the lender—and that changes the equation in a few ways. First, lenders will let you borrow more—potentially up to 90 percent of your AR. And those excluded or restricted receivables? They are no longer an issue and can contribute to your overall AR value. Finally, you may be offered better loan terms because a lender can now treat the AR as an investment-grade collateralized asset, as opposed to discounting it based on the varying mix of your client base.

Not all trade credit insurance carriers are equal. To maximize your ability to leverage the product, choose your partner wisely. Here are four questions to ask:

• How many resources does the carrier have? Large established TCI carriers with international experience have the most comprehensive databases of accurate financial information and the deepest benches when it comes to industry knowledge and credit monitoring.
• What is their credit rating? Don’t forget to check a carrier’s S&P and AM Best credit ratings. Just like in school, you’re looking for A ratings and above.
• Do they have 3PL experience? Ask whether the carrier has experience within the 3PL space and if they have formal partnerships with trade organizations, such as the TIA.
• How fast is their response time? The best TCI carriers offer both technology and an attentive service team to help you answer questions and leverage your policy. Look for companies that offer customized API integration and online portals that are actually simple, quick, and easy to use. At the same time, make sure you have quick access to knowledgeable team members, whether it’s an agent, customer service partner, or underwriter, to get you the intel you need.

Trade credit insurance has a role to play in the future of any 3PL. It allows larger 3PLs to reallocate and reduce resources dedicated to managing credit, which means they can focus on the core competencies of the business. For small and midsize 3PLs, TCI provides a formal, structured process for managing credit by giving them access to the same tools as the larger players, which would otherwise be cost-prohibitive.

Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, surety bonds, and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.

Our business is built on supporting relationships between people and organizations, relationships that extend across frontiers of all kinds—geographical, financial, industrial, and more. We are constantly aware that our work has an impact on the communities we serve and that we have a duty to help and support others. At Allianz Trade, we are strongly committed to fairness for all without discrimination, among our own people and in our many relationships with those outside our business.