Last Updated on August 17, 2021
Freight broker factoring is an excellent way to improve the cash flow of your trucking business. Freight brokers assist shippers by helping them find carriers to haul their freight loads. They serve as the intermediary, communicating with both shippers and carriers to ensure the timely delivery of a load.
A freight broker’s profit is the difference between what they earn from the shipper and what they pay to the carrier. Cash flow problems can arise for a broker because of the different payment terms of shippers and carriers.
But with freight broker factoring’s ability to enhance cash flow, it can be extremely beneficial for transportation companies. Let’s take a closer look at this financing option.
If you’re a trucker or truck owner, we also have information on how to finance your trucking business.
Common Problems that Freight Brokers Face
The most common problem freight brokers face is with their cash flow. They may encounter a conflict in balancing their income from shippers with their outgoing costs to carriers.
These cash flow problems occur because of the difference in payment terms between shippers and carriers. On the one hand, you have the shippers, who set up their payment terms to protect their cash flow. They usually stipulate that they will pay in 30 to 60 days from the invoice.
Unfortunately, you have to work with shippers to make money, so you must accept their terms. However, you are also working with carriers who need to keep their cash flow fluid and so want to receive their payment as soon as possible. As the broker, you are in the middle, negotiating your revenue with your expenses.
Another issue for freight brokers is the absence of quick pay from a shipper. With quick pay, the shipper pays for a broker’s services immediately, which the broker can use to pay the carrier. Unfortunately, many shippers do not offer quick pay, and even if they do, they can revoke it at any time.
How Factoring Can Provide Cash Flow
Freight broker factoring is a unique type of factoring accessible to transportation companies. It compensates for the delay between revenue and cost by providing immediate cash flow. A freight broker sells slow-paying invoices to a factoring company, which sends the broker an advance of up to 90% of the invoice, improving cash flow.
Instead of having to wait for the shipper to pay their invoice, you get instant funds from the factoring company, usually within 24 hours after sending them the trucking invoice. You can use that capital to pay for fuel, repairs, new customers, or other business expenditures.
After sending you the advance, the factoring company keeps the invoice and waits for your client to pay. Once the shipper pays the invoice, the factoring company deducts a factoring fee and sends you the remaining percentage of the invoice.
Factoring Process for Freight Brokers:
There are five simple steps to factoring for freight brokers:
- The broker provides a service to the customer (trucker), then sends an invoice.
- The broker submits that invoice to the factoring company for funding.
- The factoring company advances between 80-90% of the invoice value to the broker, deposited directly into their business bank account.
- The customer mails their payment to the factoring company (see: notice of assignment), which goes into a lockbox in the broker’s name.
- The remaining 10-20% of the invoice value is released to the broker, minus a small factoring fee.
Pros and Cons of Using Factoring for Freight Brokers
Freight broker factoring offers plenty of advantages with very few disadvantages. Here’s an in-depth analysis of the pros and cons.
There are several ways your business can benefit from freight broker factoring.
Immediate Improvements to Your Cash Flow
After you sell your invoices to a factoring company, they send you an instant advance covering the majority of the invoice. This capital boosts your cash flow and allows you to pay for other business expenses.
With better cash flow, you can take on more loads and gain new customers, which expands your business.
Straightforward Process with Few Requirements
To begin factoring, all you have to do is apply to a factoring company. You only have to wait a day or two before hearing back from them. If you are approved, you can begin selling invoices to them right away.
You also don’t have to meet stringent requirements to work with a factoring company. Your shippers need to have decent credit, and your company should not have a troubled financial history. Because of this, it’s much easier to acquire this type of financing than a bank loan.
Freight broker factoring can adapt to the growth of your business. If your sales volume increases, the size of your factoring line can grow. Plus, factoring is available to companies of all sizes and stages.
One unique feature of freight broker factoring is that the factoring company pays the carriers for you, deducting their payment from your advance. They do this to ensure that they are paid on time and without any hitches. If a carrier does not receive timely payment, they can file a lien on it, which obstructs the factoring company from getting paid.
Even though you give up some control with factoring, you get more time to focus on expanding your business in return.
There are just two significant disadvantages to freight broker factoring.
Not Available in Double-Brokering
Factoring companies will only finance loads that you broker directly. They will not accept invoices from double-brokered loads to protect their cash flow from brokers and customers they have not reviewed.
You will lose a small percentage of the invoice thanks to factoring fees. These charges vary based on the volume of invoices and credit worthiness of your clients. You may also have to pay administrative fees charged by factoring companies.
Typical Costs Associated with Factoring for Freight Brokers
The costs related to freight broker factoring vary depending on how risky the factoring company deems your business. Generally, there are two types of fees associated with this type of transaction: factoring fees and administrative fees.
Factoring fees differ based on the volume of invoices you are selling and the quality of your clients. Factoring companies will investigate your shipping clients’ credit to make sure they are not taking too high a risk in purchasing your invoices. Usually, a factoring fee will fall within a range of 1.15% to 3.5% of an invoice.
Administrative fees can cover several expenses, from mailing and wiring costs to set-up services.
How Factoring Can Help Grow Your Freight Business
By unlocking the cash value of your outstanding invoices, factoring provides a fast and easy way to maximize working capital. This gives your business the ability to grow while avoiding customer payment delays.
Freight brokers can fairly easily identify new customers (or shippers) via load boards. Given the scale and speed at which brokers can gain new customers, they need a predictable and scalable cash flow solution.
How to Determine if Factoring is Right for Your Business
Because there are very few disadvantages involved with freight broker factoring, it’s easy to figure out if it will help your business. The primary consideration is your cash flow. If you are struggling to cover your expenses while you wait for shippers to pay in 30 to 60 days, factoring can be a fantastic option to improve your company’s liquidity.
If your business is growing rapidly, factoring can help you keep up with your customers and bring in new ones. You may also want to consider it if you did not qualify for other types of financing.
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.