Last Updated on October 16, 2023
The freight broker can be an incredibly helpful part of a carrier’s business model. In the best of cases, they lighten the logistics load of the carrier, thereby increasing productivity and efficiency, and ultimately improving cash flow for trucking companies.
In the worst-case scenario, however, the actions of insolvent or unreliable freight brokers can run a trucking business into the ground. In this article, we’ll detail how freight brokers pay carriers and what a carrier should do if they don’t get paid.
How Freight Brokers Pay Carriers
Once negotiations are complete, agreements with brokers are verified via invoices. The carrier sends an invoice to the broker for the loads scheduled to be hauled, with payment terms depending on what the two parties agreed two in the contract. Common payment terms in trucking include net 15 and net 30, the latter, for instance, meaning the broker has 30 days to submit payment. Two popular methods of submitting payment include by check and ACH payment.
As the broker is often responsible for a good deal of money, reputable brokers will have a plan in place as to how they’re going to come up with the funds to pay their carriers. There are three common ways that brokers generate the funds to pay carries.
Large brokers are typically self-sufficient. They will have cash on hand to pay carriers for their loads as soon as they are delivered and complete. As anyone working in the industry knows, even small-scale brokers can have 10-15 loads at any given time, some of these valued at well over $1,000. Rather than paying in arrears, these self-financing brokers can afford to pay via COD (cash on delivery).
That being said, not all brokers can pay cash immediately for completed loads. Even highly reputable and efficient brokers may not have the money on hand to immediately complete an invoice. Many brokers turn to what’s called factoring so they can afford to pay their invoices.
2. Invoice Factoring
Brokers rely on slim margins to make money, between what they charge the shipper and what the carrier charges them. Because of this, budgets can be extremely tight, and it can be difficult to maintain positive cash flow. Invoice factoring helps prevent these potential cash flow problems.
With this form of alternative financing, a third-party factoring company (a “factor”) buys outstanding invoices that brokers have sent customers (shippers) and immediately advances 80-90% of the value of the invoice to the broker. This allows brokers the working capital they need to afford to take on new business in the form of carriers.
Once the broker’s shipper pays the invoice (they pay it to the factoring company, rather than the broker), the factoring company releases the remaining value of the invoice to the broker, minus a small factoring fee. Thus, brokers can afford to pay their carriers without worrying when their customers are going to submit payment.
3. Business Line of Credit
Brokers may also use a more traditional business line of credit or a business loan so they can afford to pay invoices. However, small or new brokers may not qualify for a traditional bank loan due to a lack of creditworthiness; and since factoring doesn’t require a high credit score during the application process, it’s a popular alternative.
Why Some Brokers May Not Pay Invoices Right Away
Brokers can have a reputation as being slippery, fly-by-night characters, ready to swindle honest workers out of a quick buck. While there are many documented instances of disreputable brokers failing to pay invoices, there are also plenty of legitimate reasons an invoice may not be paid immediately.
In the first place, a broker may not pay an invoice if there is an issue with the freight. Damaged cargo can be legitimate grounds for a broker’s nonpayment. Furthermore, extenuating paperwork that has yet to be completed may keep a broker from paying.
Beyond these reasons, a broker should be prepared to pay your invoice when they’ve agreed to (see broker’s payment plans above). Sometimes, however, the carrier has delivered an undamaged load in good faith and completed all required paperwork, and the broker still hasn’t paid. In these situations, you may be dealing with a broker who’s either disreputable or insolvent. If they don’t have a plan in place to finance their business, that’s when delays in payment, or complete nonpayment, can occur.
Disreputable brokers won’t pay their debts because they’d rather try and hold off payment for as long as possible. Insolvent brokers went broke in the act of brokering, and as a result, they can’t pay for the invoice you issued.
How To Deal with Brokers Who Won’t Pay Their Invoices
Carriers have options available to them when brokers don’t pay their invoices, regardless of if the broker is disreputable or insolvent.
If your broker isn’t responding to any of your lines of communication, they may be unwilling to pay your invoice.
If a broker won’t pay and has violated your agreement, you may be able to sue them for the amount they owe you. In other situations, you might hire a collection agency to collect your money for you.
Though bound by the Fair Debt Collection Practices Act, collection agencies are often able to collect when carriers are not. This is because collection agencies work along with credit bureaus and can shift the indebted broker’s credit status to “collecting,” diminishing their ability to secure future funds via credit.
By repeated phone calls, contacting friends and family, and sending out multiple late-payment reminders, collection agencies are often able to get brokers to pay their invoices. In some situations, however, a broker is simply unable to pay their debts.
It sometimes happens that, due to poor management of their business or through extenuating circumstances outside of their control, brokers simply don’t have the cash to pay their invoices.
It is unfortunate but true that very often, if your broker goes out of business, your unpaid invoice will never be fully paid. If the broker files bankruptcy, you may be able to see some of this cash pay your invoice following the liquidation of the broker’s assets. That said, however, it’s likely not just you but many to whom the broker owes money. This could mean that only a tiny portion of your debt is paid off.
Besides suing the broker or going to a collection agency, you might file a claim against a freight broker surety bond. A freight broker surety bond (which looks like this) is a kind of insurance brokers must file with the Department of Transportation (via the selfsame department’s requirements for business operation). In theory, these bonds prevent fraud and help protect carriers in situations of nonpayment or insolvency.
How To Avoid Broker Nonpayment
Although plenty of options exist for carriers to get paid by non-compliant brokers, the cheapest and fastest way to be paid for your invoices is to avoid broker nonpayment complications in the first place. How can you do this?
Communication is Key
Like that of a broker and a carrier, the most important part of any business relationship is communication. Communication is always key, but especially when thousands of dollars are involved. You need to work out your payment agreement ahead of time with your broker. Keep detailed notes, expense reports, and have the delivery and payment processes outlined fully on paper before agreeing to go into business with a broker.
Perform a Business Credit Check
Furthermore, you should select a reputable broker. The best way of finding out whether or not a broker is reputable is by checking their business credit score. A broker with a strong credit history and a diverse portfolio of repayments should be a high priority.
Insist on Invoice Factoring
For added security, you may insist that your broker use factoring. In non-recourse factoring (highly recommended over recourse factoring), the factoring company absorbs the damage if the broker can’t pay (not the invoice issuer, you).
In Summary: How Freight Brokers Pay Carriers
Going into business with anyone is a leap of faith, but it doesn’t have to be completely blind. If the worst does happen and a broker won’t pay, you do have options, but you can significantly reduce the chances of this happening with a little groundwork.
Working with reputable brokers, getting details in writing from the very start, consistent communication, and securing your business with non-recourse factoring can ensure the cogs of your business continue to turn.
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.