In the dynamic world of logistics and freight forwarding, financial management is a critical aspect of maintaining a healthy business. One of the contentious issues in this realm is whether freight forwarding companies should extend credit to their clients. As someone with substantial experience in freight forwarding, I firmly believe that we should not offer credit, as we are not banks. Here’s why:
1. Financial Risk
Extending credit inherently involves a degree of financial risk. Clients may face unforeseen financial difficulties, leading to delayed payments or defaults. Unlike banks, freight forwarding companies may not have the robust risk assessment frameworks and capital reserves necessary to absorb these potential losses. By not extending credit, freight forwarders can safeguard their financial stability and avoid the complexities of managing bad debt.
2. Cash Flow Management
Maintaining a positive cash flow is crucial for the operational efficiency of a freight forwarding company. Offering credit can disrupt this balance, as payments may be delayed, leading to cash flow problems. This can affect the company’s ability to pay its own suppliers and employees, potentially compromising the quality of service. Ensuring prompt payment helps maintain a steady cash flow, enabling the company to operate smoothly and invest in growth opportunities.
3. Focus on Core Competencies
Freight forwarding companies excel in logistics, transportation, and supply chain management—not in financial services. Extending credit requires significant resources for credit checks, monitoring, and collections, which can divert focus and resources away from the core business activities. By not offering credit, freight forwarders can concentrate on enhancing their logistics services, improving customer satisfaction, and expanding their market presence.
4. Industry Practices and Precedents
In many cases, the freight forwarding industry operates on the basis of prepayment or cash-on-delivery terms. This practice aligns with the nature of the business, where operational costs are incurred upfront, such as transportation fees, customs duties, and handling charges. Following this established industry norm helps maintain consistency and financial discipline across the sector.
Conclusion
While the temptation to extend credit to clients may arise in a competitive market, it is essential for freight forwarding companies to recognize their primary role and strengths. By avoiding the extension of credit, freight forwarders can mitigate financial risks, maintain healthy cash flow, and focus on delivering exceptional logistics services. Instead, exploring alternative financial solutions in partnership with banks or financial institutions can strike a balance between supporting clients and preserving the financial health of the company.
In conclusion, freight forwarding companies should leave credit extension to the experts—banks and financial institutions—and concentrate on what they do best: facilitating the smooth and efficient movement of goods around the world.
Osama Akeely
CEO
Overseas