Last Updated on October 11, 2022
As a freight broker, you depend heavily on prompt invoice payments to pay operating costs and carriers. However, sometimes you must wait for weeks or even months for payment, causing negative cash flow and mounting debts.
To grow your business and be competitive in the market, you need access to cash to keep up with payments and build good relationships with carriers, which is where freight broker factoring comes in. In this article, we discuss how factoring works, its benefits, and how it compares to other financing alternatives.
Read on to learn how to enhance your cash flow through freight broker factoring!
What Is Freight Broker Factoring?
Freight broker factoring is when your business sells invoices to a third party in exchange for a cash advance. It is often used to improve cash flow when customers are slow to pay their invoices, as late payments generally result in negative cash flow that can hurt your business.
Benefits Of Invoice Factoring For Freight Brokers
Invoice factoring is an excellent alternative financing method that is easy to get and ensures you receive payment quickly. Here are some benefits of factoring for brokers:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best freight broker factoring companies approve your applications within 1 or 2 days. Once you submit an invoice, you will typically receive up to 95% of your hard-earned money within 1 or 2 days instead of 30, 60, or even 90 days.
Access Capital To Grow While Maintaining Equity
Freight broker businesses often sacrifice equity for cash to grow their companies, but invoice factoring sets them up for long-term success. Freight broker factoring provides quick cash to help your business pay debts, find new carriers, and grow without compromising your business financially.
Take The Guesswork Out Of Payments
Bad debt and overdue accounts can hamper your business growth and damage your finances. Invoice factoring mitigates the impact of delinquent customers to ensure your business stays financially healthy.
How Does Freight Broker Invoice Factoring Work?
Factoring for freight brokers works by turning unpaid invoices into cash for operating expenses and business growth. Instead of waiting for customer payments to fund your next shipment, invoice factoring services provide cash whenever needed. By submitting your invoices to a factoring company, you can focus on growing your business instead of stressing over late payments.
How does freight broker factoring work? Here is a simple guide to invoice factoring:
Submit Your Unpaid Invoices
Factoring companies (also known as the “factors”) accept all kinds of unpaid invoices, though they generally favor invoices from creditworthy customers and large or medium-sized companies. Additionally, keep in mind that some factors do not factor invoices for customers who consistently make late payments. If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
Receive Advances Up To 95% Of The Invoice Face Value
You can generally expect a factoring advance rate of 90-95% of the invoice’s face value and receive the cash advance between 24 and 48 hours after submission. In freight broker factoring, companies generally deposit a portion of your cash advance to your carriers to ensure they are paid before transferring the rest to your bank account.
The Factor Helps Collect Payment For Your Outstanding Invoices
The factor assists your collection efforts by providing a lockbox for all customer payments and reporting repayment progress through an online customer portal. If issues arise, factoring companies will work with the shipper to collect payment and resolve disputes professionally so you can maintain good working relationships.
The Factor Pays Out The Remaining Unpaid Invoice
Once your customer has sent payment to the lockbox, the factoring company will deduct its factoring fee, which is typically 1-5% of your invoice, and send the remainder of the invoice value to your company.
Uses For Your Factoring Cash Advance
Receiving cash advances from invoice factoring means you do not have to wait on customer payments to fund your business. Instead, you can avoid long payment cycles and unlock working capital sooner to accelerate company growth. Check out some ways you can use funding from freight broker factoring below:
Make Carrier Payments
Paying your carriers on time is one of the hallmarks of a healthy freight brokerage. Getting a cash advance from an invoice factoring provider means you can always pay your carriers on time and keep them happy, even when your customers take a long time to pay.
Take On New Orders
You should not be forced to wait for invoices to clear to take on new orders and grow your business. Instead, you can use cash from factoring your invoices to find new shippers and carriers, pay for software, and market your business to scale your operations while maintaining equity.
Pay Operating Expenses
Freight broker expenses include your business registration, insurance, and bonds. A cash advance from freight broker factoring gives you extra liquidity to pay these expenses without putting a dent in your finances.
Staffing And Recruitment
Recruiting and training new freight agents need an upfront investment, which is where freight broker factoring can help. Factoring your invoices improves your cash flow, which can be used to fund growth initiatives like freight agent recruitment and training.
Freight Industry Businesses We Fund And Finance
altLINE provides invoice factoring services to many businesses in the freight and logistics industry. Here are some examples of businesses that can benefit from invoice factoring:
- Freight brokerages
- Transportation companies
- Trucking companies
- Logistics companies
- Hotshot truckers
- Fleet trucking companies
Factoring Your Freight Broker Invoices vs Other Funding Options
In addition to invoice factoring, you have a few other options to improve cash flow and liquidity, like applying for bank lines of credit, getting ACH/MCA loans, and offering quick pay discounts to shippers. In this section, we compare these alternative financing methods against freight broker factoring.
Freight Broker Factoring vs Bank Line Of Credit
A bank line of credit is usually the first financing solution chosen by businesses. While some freight brokers can qualify for a line of credit, the funds may not be enough to properly grow their businesses.
Banks usually determine your line of credit approval and lending limits by examining your credit profile and fixed assets. However, freight brokers typically do not have many fixed assets, so the bank may give you a lower lending limit that is not enough to fund your business and achieve long-term growth. If you are a new company, you may not have much credit built up, making a line of credit qualification harder in the first place.
Conversely, freight broker factoring companies look to your shippers to approve cash advances by examining their invoice turnover and dilution. By controlling the flow of payments and looking to an established customer base, factors will give you enough working capital to grow your business when banks cannot.
Freight Broker Factoring vs ACH And MCA Loans
ACH (automated clearing house) or MCA (merchant cash advance) loans are very easy to qualify for and take only one or two days to provide funds.
However, ACH and MCA loans come with unreasonably high interest and lender fees that can reach up to 60% of your original loan. If you cannot repay the initial loan, your lender may offer extra loans that can put you in dire financial straits.
Invoice factoring is typically safer because all cash advances are made on eligible invoices from reliable shippers. Because you are certain the customer will repay your cash advance, you can focus on growing your business and not stressing over debt repayment.
Freight Broker Factoring vs Quick Pay Discounts
Offering your shippers discounted rates for paying before invoices are due can accelerate your cash flow when needed. However, offering quick pay discounts does not guarantee that customers will pay faster. If the customer values having liquidity and cash on hand over your discounted rate, they may pass on your offer, leaving you low on cash and unable to efficiently grow your business.
Invoice factoring provides more certainty because you will get advances on all your eligible invoices, guaranteeing an improved cash flow.
Typical Freight Broker Factoring Rates and Fees
How much do factoring companies charge freight brokers? Invoice factoring fees depend on how much you plan to factor and how long your customers take to pay. Factoring more invoices and getting customer payments more quickly generally lead to lower factoring rates. Factors also consider other criteria like how long you have been in business, the diversity of your customer base, and overall customer credit quality.
When factoring an invoice, there are generally two types of fees:
- Initial fee: This fee covers the factoring expenses for the first 30 days and costs up to 3.50% of your invoice’s face value.
- Incremental fees: These fees cover factoring expenses beyond the first 30 days and cost up to 1.50% of your invoice’s face value per charge.
Requirements To Apply For Freight Broker Factoring
Before you can start factoring invoices with quality factoring company, you must provide some information to determine your qualification. Here are what you need:
List Of Existing And Potential Customers
Factors often require a list of your existing and potential customers as part of your approval process. They need this list to review customers’ credit quality and factoring eligibility.
You must complete an application before factoring invoices. You will typically need to enclose the following documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
An accounts receivable aging report lists all outstanding invoices based on maturity dates. This report is used to research your customers’ payment behaviors and determine which ones are eligible for factoring. Companies like altLINE will consider invoices 60 to 90 days outstanding, but invoices where customers say they cannot pay may be ineligible for factoring.
Frequently Asked Questions About Our Factoring Services
Have some more questions about invoice factoring with altLINE? Here are some of the most common questions answered!
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all potential clients. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify a different factor that is willing to help.
Do you require UCC filings when factoring freight broker invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is freight broker factoring considered debt or a loan?
Freight broker factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so a client may need to pay the cash advance back if a customer fails to pay their invoice.
Do you offer non-recourse factoring?
altLINE only offers recourse invoice factoring. While a client must repay the cash advance if their customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on customers. For more information on recourse vs non-recourse factoring, check out our article.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.