Operating a successful freight brokerage can be financially rewarding. However, freight brokerages are financially demanding. Their primary financial issue stems from the fact that expenses must be paid quickly but revenues flow in slowly. This article discusses how to manage this challenge using financing. We cover:
- Do you have this cash flow problem?
- Can you ask shippers for a quick pay?
- Freight bill factoring
- How are carrier payments handled?
- Do your profits support using factoring?
1. Do you have this cash flow problem?
Freight brokerages are cash-flow-intensive businesses. Most shippers negotiate payment terms, giving them 30 to 60 days to pay your invoices. These payments can put you in a difficult position because you have expenses that need to be paid sooner.
A freight broker’s largest expense is payments to their partner carriers. The carriers and owner-operators you work with also have several expenses to manage. They have to cover the costs of picking up the load and hauling it to the final destination. Most companies, especially owner-operators, will ask you for a quick payment since they need the funds to operate their business.
This situation creates a financial dilemma for the freight broker. The broker has to quick pay the carrier out of their cash reserves while waiting for the shipper to pay the invoice 30 days later. Eventually, this pattern becomes unsustainable. There are two possible short-term solutions, though neither works well in the long-term:
a) Pay the carrier quickly
Paying the freight carrier quickly helps the carrier and increases your reputation with the carrier. Finding reliable carrier partners is difficult, and keeping the owner-operators happy is essential to long-term success. However, paying the carrier before your shipper pays you draws down your cash reserve. This strategy limits the number of clients you can take and your ability to grow. It also puts you at risk of overextending your company, which could have serious consequences.
b) Pay the carrier on net-30 terms
Another option is to put your carriers on terms similar to those of your shippers, matching your shipper revenues with your carrier expenses. This arrangement may work in theory, though you may find that owner-operators are less willing to haul loads for your company. After all, they have cash flow pressures as well and need to be paid quickly.
2. Can you ask your shippers for quick pays?
A simple alternative is to ask your shippers to pay your invoices quickly. If this method works, it would solve most of your financial problems. You get paid quickly by shippers and, in turn, pay carriers quickly. Getting quick pays is great, though they aren’t always reliable.
Shippers that offer quick pays do so because it is to their advantage. They have excess cash they can use to pay your invoices quickly. This quick payment gives them a discount on your services and increases their profit. However, if economic conditions change, shippers can always revert to paying on their usual terms. This possibility could create problems for you down the line.
In most cases, you can improve your cash flow by using freight bill factoring. We cover this solution in the next section.
3. Use freight factoring financing
One way to solve this financial challenge is to use freight bill factoring. Factoring allows you to finance your shippers’ slow-paying invoices. This gives you the funds to pay for your company’s carrier and operational expenses. Factoring transactions settle once your shipper pays in full on their usual terms.
Freight factoring plans advance freight brokers up to 90% of the invoice. Higher advances are usually not available to brokers due to the industry’s profit margins. The remaining 10%, less the financing fees, is deposited into your bank account when the shipper pays the invoice. To learn more, read “What is Freight Bill Factoring?”
4. How are carrier payments handled?
One important detail that is specific to factoring freight brokers is that the factoring company pays your carriers directly. The reason for this requirement is due to the Bills of Lading Act. The act allows carriers to collect payment from a shipper if the broker does not pay them.
However, factoring companies depend on the shippers’ payments to settle transactions. Consequently, factors pay your carriers because it preserves their position as a secured party.
Some factoring companies pay your carriers on net-30-day terms but give them the option for a quick pay if they need to get paid sooner. This arrangement should work well for your carrier partners since they usually need to be paid quickly. Handling carrier payments adds to the factoring company’s workload. Consequently, many factors include a small additional cost to cover their expenses.
The main advantage of using freight bill factoring is improving your cash flow. It enables your company to take on new shippers and grow. Additionally, the factoring line is tied to your receivables. The line adapts and grows as your client roster grows.
Qualifying for freight bill factoring is easier than qualifying for most conventional financing solutions. The main requirements include:
- Operate a freight brokerage
- Work with creditworthy commercial shippers
- Have invoices free of liens
- Be free of major problems
6. Do your profits support using factoring?
We should note that factoring is more expensive than conventional bank financing solutions. This situation challenges some freight brokerages since many have low profit margins.
Factoring works best for companies with a minimum profit margin in the 15% to 20% range. It also works best for invoices that are paid in 45 days or less. We suggest you compare your profits against expected factoring costs to determine if the company can support factoring. Consult an accountant if you need help with this step.
Get more information
Are you looking for factoring? We are a leading factoring company and can provide high advances at low rates to freight brokers. For information, get an online quote or call toll-free (877) 300 3258.