Running a freight brokerage requires careful management. As a broker, you are in the middle of a transaction, balancing the demands of your shippers and carriers. Aside from the obvious logistical problems, this situation can also create cash flow problems. This article discusses how to finance a growing freight brokerage and solve the most common cash flow problem. We cover the following:
- What is the biggest financial problem?
- Are you using quick pays to pay other quick pays?
- Factor your invoices
- Do you qualify?
1. What is your biggest financial problem?
The biggest financial problem for many freight brokers is their cash flow. The reason for this problem is that most freight brokers have low cash reserves. However, freight brokerages are cash-intensive businesses. This combination can create cash flow problems, especially if the brokerage is growing quickly.
As intermediaries, brokers find themselves in the middle of every transaction. They have to balance the competing requirements of shippers that want to pay slowly and carriers that want a quick pay.
a) Shippers pay slowly
Most shippers, especially larger ones, often require net-30 to net-60 days to pay an invoice. They expect these terms as a condition of doing business with them. If your brokerage can’t offer payment terms, they will quickly take their business elsewhere.
This situation affects growing freight brokers that don’t have a cash reserve. These brokerages operate with razor-thin cash flows, often waiting for shipper payments while delaying carrier payments. The strategy of juggling payments may work for a while, but it fails eventually. It’s just a matter of time. This situation can affect your brokerage’s credit rating and reputation.
b) Carriers want quick payments
Carriers, on the other hand, want quick pays. They want their invoices paid soon after they deliver the load. To complicate matters, some carriers may even ask for advances before they deliver the load.
Most freight brokers manage this situation by asking the trucking company for net-30- to net-60-day terms. After all, the shipper demands terms as well, so everyone has to wait for payment. This solution can work if the carrier agrees to the terms and matches the time frame between the shipper’s and the carrier’s payments. This strategy can work well if carriers agree to these terms.
Remember that trucking companies have the same cash flow problems as your company. They need their brokers to pay quickly so the freight carrier can cover its expenses. The last thing you want is a good, reliable trucking company to stop pulling loads for you because they don’t accept your payment terms.
2. Can quick pays solve the problem?
One way to handle this problem is to use quick pays. Quick pays are the transportation industry version of a discount for early payment. The shipper agrees to pay you within ten days if you discount their invoice by 1% to 3% (varies). This solution gives you quick funds, which you can use to pay your carriers.
Quick pays can work well if you match shipper quick pays with carrier quick pays. This approach is similar to the strategy of matching payment terms but using quick pays instead. By also using quick pays with the carrier, you can pass some of the discount costs to the carrier, which helps your profits.
The weakness of this strategy is that it works only when shippers offer quick pays. Even shippers that offer quick pays have the option to stop offering them if economic conditions change. This scenario creates some uncertainty in your cash flow. However, this strategy can work if your cash flow problems are not serious.
If your company has ongoing cash flow issues or is growing quickly, consider adding a financing solution to improve your cash flow. One option that works well in these circumstances is to finance your invoices with factoring.
3. Factoring your invoices
Your brokerage can get dependable cash flow and handle slow-paying shippers by financing its invoices. The most common way to do this is to use freight factoring. Freight factoring provides a funds advance as soon as the load is delivered and you invoice the shipper. The advance enables you to pay trucking carriers and other critical business expenses.
a) How does freight factoring work?
The first installment is called the advance and covers up to 90% of the invoice. It is deposited into your bank account soon after you submit the invoice for financing. The remaining 10%, less the factoring fee, is deposited to your bank account once the shipper pays the invoice in full, on their usual schedule. This deposit settles the transaction. For more information, read “What is Freight Factoring?”
b) How are carrier payments handled?
Freight broker factoring has one important difference from conventional factoring. Factoring companies usually pay your drivers directly on your behalf. This carrier payment is deducted from the 90% advance that factoring companies provide. This detail is important. The main reason factors pay carriers directly is to ensure that carriers get paid promptly. Otherwise, carriers could file a lien against the payment. This lien interferes with the factoring company’s ability to get paid.
Having factors pay your carriers directly has one advantage. Direct payment helps brokers by offloading a routine task, enabling you to focus on growing your business.
c) How much does it cost?
The factoring fee varies for each transaction. In general, fees are determined by the volume you want to finance, the size of each invoice, and the credit quality of your shippers. Fees usually are between 1.5% and 3% per 30 days, depending on these criteria. The fees for factoring freight brokerages are slightly higher than the fees to factor a carrier due to the added workload.
4. Advantages of freight factoring
Factoring your freight invoices has many advantages over other solutions. Advantages include:
- Improves your cash flow quickly
- Can be deployed in days
- Grows as your brokerage grows
- Easier to obtain than conventional financing
5. Does your brokerage qualify?
Qualifying for factoring is easier than qualifying for other financing solutions. To qualify, your company must:
- Have its own authority (no exceptions)
- Work with creditworthy shippers
- Invoice a minimum of $50,000 per month
- Have been in business for a few months
- Have no serious tax problems
Freight bill factoring can help brokerages that have cash flow problems due to slow-paying shippers. It’s easier to obtain than conventional solutions and can be deployed quickly. When used correctly, it can provide a platform for growth.
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