Debunking 5 Common Myths About Trade Credit Insurance: What You Need to Know

Introduction: Rethinking Trade Credit Insurance

In today's rapidly changing business landscape, managing credit risk has become more crucial than ever. Many companies, however, still hold misconceptions about trade credit insurance (TCI) that may be hindering their growth and financial security. Have you ever found yourself thinking, "Trade credit insurance is too expensive and doesn't cover my needs," or "Managing credit risk is an obstacle to my business development," or perhaps, "I have financial resources to cover any unpaid invoices!"? If so, it's time to reconsider these notions, especially in an environment where claims experience is accelerating, and the risk of bad debts is growing.

At FreightAmigo, we understand the importance of effective risk management in the logistics industry. As a digital supply chain finance platform, we've seen firsthand how proper credit risk management can make or break a business. In this article, we'll debunk five common myths about trade credit insurance and explore how it can benefit your organization in ways you might not have considered.

Myth 1: Managing Credit Risk Inhibits Sales

One of the most persistent myths about credit risk management is that it hampers business growth. Many believe that credit managers and business developers have opposing goals – one wants to secure the business, while the other wants to conquer new markets. However, this couldn't be further from the truth.

In reality, effective credit risk management and business development go hand in hand. Consider this: what's the point of sealing a deal with a client if they don't have the resources to fulfill their obligations? A more strategic approach is to have your sales and credit management teams work together closely.

Here are some eye-opening statistics that highlight the importance of proper credit management:

• 80% of businesses today face unpaid debts
• 25% of outstanding invoices lead companies to bankruptcy
• Since 2023, there has been a sharp spike in payment defaults and corporate insolvencies, exceeding pre-Covid levels

These figures underscore the critical need for effective credit risk management. By partnering with a global expert in trade credit insurance, you can manage risk more effectively and reduce your exposure to unpaid debts. This approach allows you to grow your business securely, making informed decisions that steer your commercial strategy in the right direction.

At FreightAmigo, we understand the delicate balance between growth and risk management in the logistics industry. Our digital platform is designed to help you navigate these challenges, providing tools and insights that support both your sales efforts and risk mitigation strategies.

Myth 2: I Know My Clients Well, So I Don't Need Credit Insurance

It's a common trap to base credit decisions solely on standard credit checks or public records of clients' financial statements. This approach can lead to a false sense of security. The danger lies in discovering your client or supplier's poor financial health only when their business is already on the brink of collapse. By then, it may be too difficult to extricate yourself from the business relationship, potentially leading to heavy financial losses.

To develop your business with confidence, you need a comprehensive, accurate, and up-to-date assessment of your risk exposure. This assessment should consider your markets, stakeholders, and their geographical locations. Modern trade credit insurance services integrate real-time data from multiple sources to assess a company's likelihood of failure over the next 12 months.

For instance, leading credit insurers often provide access to databases consisting of millions of companies, payment incidents reported by tens of thousands of clients, worldwide networks of information partners, and analysis carried out by hundreds of risk underwriters. This level of insight goes far beyond what most businesses can gather on their own.

At FreightAmigo, we recognize the importance of having access to accurate and timely information in the logistics industry. Our digital platform is designed to provide you with the tools and data you need to make informed decisions about your business partners, helping you navigate the complex world of international trade with greater confidence.

Myth 3: Fraudsters Only Target Large Companies

Many small and medium-sized enterprises believe they're safe from fraudsters, assuming that scammers only go after big fish. However, this is a dangerous misconception. The truth is that fraudsters often take the path of least resistance, targeting companies of all sizes across various industries.

While official figures on corporate fraud are scarce, research consistently points to the same conclusion: the scale of the problem is enormous, and it has grown significantly in recent years with the widespread adoption of digital technologies.

Some key points to consider:

• Fraud involving fake suppliers is one of the top three sources of business fraud
• While large companies might be able to absorb financial losses from fraud, smaller businesses often find it much more challenging
• The digital transformation has opened up new avenues for fraudsters, making businesses of all sizes vulnerable

Trade credit insurance and business information services can significantly boost your capacity to spot potential scams. These solutions help you control your risk exposure more effectively and implement preventive measures. They typically include:

• Analysis of potential clients and suppliers
• Verification of business partners' identities
• Monitoring of fraud reports
• Regular updates about suspicious activities involving your business partners

At FreightAmigo, we understand the unique challenges faced by businesses in the logistics sector when it comes to fraud prevention. Our digital platform incorporates advanced security measures and provides tools to help you verify the legitimacy of your business partners, reducing the risk of falling victim to scams in your international trade operations.

Myth 4: Credit Insurance is Expensive and Doesn't Cover My Needs

Many companies perceive credit insurance as an unnecessary expense, especially when their trading partners are currently meeting their commitments. However, this view often fails to consider the potentially devastating impact of even a single unpaid invoice on a business.

Consider this scenario: If you're owed €10,000 and your mark-up is 10%, your company would need to generate additional sales of €100,000 to compensate for that single unpaid invoice. This example illustrates how quickly unpaid debts can escalate and affect your bottom line.

Modern credit insurance solutions go beyond simple indemnification. They typically offer a range of value-added services designed to help businesses prevent unpaid debts and manage risk effectively:

• Real-time evaluation of trading partners' financial solvency
• Expert analyses and assessments to guide development strategies
• Collection of outstanding invoices
• Indemnification of unpaid receivables

These comprehensive solutions leverage global expertise in risk management, often backed by decades of experience. They aim to make businesses more profitable and secure by providing:

• Support for businesses of all sizes across various sectors
• Close monitoring and assessment of default likelihood
• Access to real-time data on commercial risk
• Protection against high-risk clients

Furthermore, trade credit insurance can serve as a powerful tool for controlling commercial risk. It involves monitoring the payment behavior of existing clients, evaluating potential business partners, and gathering business intelligence across the entire supply chain. This is particularly valuable in today's uncertain and volatile economic environment.

At FreightAmigo, we recognize the importance of comprehensive risk management in the logistics industry. Our digital platform is designed to complement and enhance the benefits of trade credit insurance, providing you with additional tools and insights to manage your financial risks effectively in the complex world of international trade.

Myth 5: Self-Insurance is Cheaper

Some businesses believe that maintaining a financial cushion to cover potential losses from client defaults is a more cost-effective solution than purchasing trade credit insurance. While this approach might seem logical at first glance, it often falls short in practice.

Here are several reasons why self-insurance may not be the best strategy:

• Domino Effect: When a large business collapses, it can trigger a chain reaction, causing many of its suppliers to fail within months. This can wreak havoc on entire sectors. Do you have sufficient reserves to cover the loss of multiple clients or suppliers in a short timeframe?
• Expertise Gap: Self-insurance doesn't provide you with debt collection expertise or knowledge about payment habits, local laws, and specific requirements in different markets.
• Hidden Costs: Self-insurance often consumes more resources – both human and financial – than initially expected. These include:
  • Gathering and analyzing financial information about partners
  • Commercial and financial arbitration
  • Decisions about amounts outstanding to be granted
  • Collecting unpaid invoices
  • Checking the solvency of a debtor
  • Out-of-court negotiations versus legal proceedings
• Blind Risks: Self-insurance is essentially the same as having no insurance or protection at all. You're taking "blind" risks, with no guarantee that your company will be indemnified if it suffers a loss.

Trade credit insurance, on the other hand, offers a more comprehensive and often more cost-effective approach to risk management. It provides not just financial protection but also valuable insights and services that can help your business grow securely.

At FreightAmigo, we understand the complexities of risk management in the logistics industry. While we don't offer insurance ourselves, our digital platform is designed to work in harmony with trade credit insurance solutions, providing you with additional tools and insights to manage your risks effectively and make informed decisions in your international trade operations.

Conclusion: Embracing Trade Credit Insurance for Business Growth

As we've explored in this article, many of the common beliefs about trade credit insurance are misconceptions that can hold businesses back from realizing its full potential. In today's volatile economic landscape, effective credit risk management is more crucial than ever, especially in industries like logistics where international transactions and complex supply chains are the norm.

Trade credit insurance is not just about protecting your business from bad debts. It's a powerful tool that can support your growth strategy, provide valuable market insights, and give you the confidence to explore new opportunities. By debunking these myths, we hope to encourage more businesses to consider how trade credit insurance could benefit their operations.

At FreightAmigo, we're committed to helping our clients navigate the complexities of international trade with confidence. While we don't offer insurance ourselves, our digital supply chain finance platform is designed to complement and enhance the benefits of trade credit insurance. By combining our advanced logistics solutions with robust risk management strategies, businesses can position themselves for sustainable growth in the global marketplace.

We encourage you to reassess your approach to credit risk management and consider how trade credit insurance, alongside digital logistics solutions like FreightAmigo, could help your business thrive in these challenging times. Remember, in the world of international trade, being well-informed and well-protected is not just an advantage – it's a necessity.