Freight broker factoring doesn’t have to be as complicated as Chinese math. In fact, it is a fairly simple concept.
In this blog, we will deep dive into several key topics including:
What is freight broker factoring?
How to factor invoices as a freight broker?
How to select the best freight broker factoring company for you?
And much more…
What is Freight Broker Factoring?
Freight broker factoring allows freight brokers to get cash upfront vs waiting 30-60 or even 90 days to get paid. The freight broker simply sells or assigns an unpaid invoices to a factoring company in exchange for cash upfront.
That’s why it’s also called freight bill factoring. After you sell your invoice to them, the transportation factoring company then advances up to 95% of the money to you – sometimes as quickly as the next day.
This means the freight broker doesn’t have to wait 30-90 days for the customer to pay and always has enough capital to pay the trucking company that hauled the load.
Factoring services are one of the best ways to cashflow a new freight broker startup or finance growth of an existing freight broker business.
Difference Between Factoring vs Traditional Financing
Freight broker factoring has gained popularity because it solves one of the biggest issues in the logistics and trucking industry: cash flow. In this business, time is of the essence, and quick access to funds is critical to build momentum and sustain growth.
Traditional bank loans often come with lengthy approval processes and stringent credit requirements. Many freight broker startups, small freight brokerages, and owner-operators find it challenging to qualify for such loans until they have significant financial history and credentials.
So, if you’re a freight broker startup with limited capital or looking for ways to make your business grow stronger, keep reading to find out how freight broker factoring companies can be a real game-changer.
How Can Freight Brokers Use Factoring Companies?
So how exactly does factoring work for freight brokers and transportation companies?
While it might sound a bit confusing for first time users, freight broker factoring is a relatively simple process.
Freight Broker Factoring in 3 Basic Steps!
Step 1: Provide the freight broker service and then invoice your shipper
Step 2: Provide a copy of the invoice to the factoring company. After that, you can typically receive your first installment, ranging from 90-95% of the total invoice, within 1-2 days.
Step 3: After the factoring company receives payment from your shipper, they will pay you the remaining balance, minus their fees. Factoring company fees typically range from 1.5% to 5% of the invoice’s face value.
Freight Broker Factoring Transaction Breakdown
Let’s assume you invoice for your shipper for $1,000.
Without Invoice Factoring
Without freight broker factoring, you’d wait anywhere from 30-90 on average to get paid the $1,000 that is owed.
The exact number of days depends credit terms with your shipper, the shippers credit rating and their willingness to pay promptly.
With Invoice Factoring
But with invoice factoring, the factoring company advances 90-95% of the invoice value within 1-2 days.
Allowing you to pay the trucking company that hauled the load, as well as other possible overhead.
Once the shipper pays the invoice, the factoring company deducts their fee (typically 1.5% – 5%) from the remaining balance.
Which means, they keep about $30-$50 as a factoring fee and advance the rest to you.
So, rather than waiting 30 – 90 days to receive your $1,000 payment.
The freight broker factoring company can pay you $900-$950 in 1-2 days and the remaining balance after the shipper pays the full invoice, minus fees.
The biggest benefit of factoring services is obviously cashflow but there are more benefits as seen below.
Benefits of Freight Broker Factoring
- Provides quick cash to pay your expenses and grow your business
- As your business grows so does your immediate cash flow
- Include comprehensive free credit checks on shippers
- Makes sure you have steady cash on hand to process carrier payments
- Allows you to bridge cash flow problems
- Increases your working capital
- Is based on the credit history of your customers and not on yours
- Avoid long waiting periods and massive paperwork of other lenders (such as banks)
- Gives you peace of mind that your debt will always be paid
- Allows you to offer additional quick payment options to trucking companies
Disadvantages Of Using a Freight Factoring Company
- Short-Term Costs:The factoring fee typically ranges from 1.5% to 5%, so it is more expensive than a traditional bank loan. This cost will cut into your profits, and may be too expensive for businesses with thin profit margins.
- Loss of Revenue: When you factor your invoices, you receive an advance, but you will not receive the full invoice amount. That is because the factoring company keeps a percentage of the invoice as their service fee for providing the cash advance.
- Stressed Customer Relationships: Some shippers may not understand the process of factoring or they may be concerned about paying a third party factoring company.
- Higher Long-Term Costs: While factoring provides nearly immediate cash, the higher service fees means it can be more expensive in the long run. This is especially true compared to other financing options like bank loans.
- Risk of Non-Payment: In recourse factoring, you are responsible for any unpaid invoices if your customers don’t pay. So you carry the risk of non-payment. In non-recourse factoring, the factoring company assumes this risk, but it this usually comes with higher fees.
- Dependency: Becoming dependent on factoring as your primary source of financing can become a major issue if you exclusively rely on factoring.
- Loss of Control: When you factor your invoices, you let the factoring company handle the collection process to the factoring company. You lose control over the process of managing late payments, customer disputes, and invoice collection. Some brokers count this as an advantage.
- Minimum Requirements: Some freight broker factoring companies impose monthly or annual factoring volume requirements and minimums. This becomes a costly problem if your company doesn’t consistently meet contractual requirements.
- UCC Filing: (Uniform Commercial Code) Factoring company will have a UCC filing on your companies assets which can make traditional financing more difficult later.
Freight Invoice Factoring Rates
Now you know the advantages and disadvantages of freight broker factoring. Let’s talk about the rates and cost of using a factoring company.
As I mentioned before, typical rates are between 1.5% and 5%. So, the larger your monthly amount is factored the lower your fees can be. Some charge a flat rate while others have variable rates.
While it costs more to factor your receivables than traditional bank financing, many freight broker startup businesses can not qualify for traditional bank financing until they have established a 1-2 year relationship with their bank.
Your Factoring rates also depend on:
- The size of each invoice you need factored
- Your exact industry and niche within the transportation industry
- Your client’s credit
- How long it takes your clients to settle the invoice
- Recoure or non-recourse.
Is Factoring Right for My Company?
Before you seriously consider working with a factoring company, you probably want to know if factoring is right for you.
The good news is that there are different freight broker factoring companies to choose from. So, you can choose one that fits your unique needs.
For freight broker factoring in particular, there are two options: Recourse factoring and non-recourse factoring.
Recourse factoring means that you are responsible for outstanding invoices. Meaning, you own the risk of non-payment by the shipper. The advantage of recourse factoring is a lower rate.
This means if the factoring company advances you 90% of the invoice and the shipper does not pay, you will have to repay the factoring company for the 90% advance.
True non-recourse factoring, on the other hand, allows you to sell your invoices to the factoring company. Meaning, the factoring company takes all the risk once they purchase the invoice from you, the freight broker. This is a great advantage to have but it will also cost more.
How to Pick the Best Freight Broker Factoring Company
Unless you have prior experience working with freight broker factoring companies, you might not know how to pick the best company. Use the list of questions below when choosing a factoring company.
Here are 5 questions every freight broker should ask when selecting a factoring company:
1) What are the monthly minimums? You need to know in advance to make sure you can meet the minimums. Otherwise, it can lead to unnecessary expenses and fees.
2) Is this a recourse or non-recourse factoring company? In other words, who will be taking the risk in case a client doesn’t pay? This huge distinction has major financial and legal repercussions that directly affect your business’s risk exposure.
3) What’s the duration of the contract? Depending on your business goals, a more flexible short-term contract or a long-term contract may better suit your needs.
4) What are the fees and how are they structured? This is important because transparent fee structure helps you avoid hidden fees and more easily manage costs.
5) What kind of service can you expect? In addition to providing financial support, the factoring company should be responsive and reliable.
The answers to these questions directly impact the compatibility of your potential partnership with the factoring company. There are many more questions to ask when selecting a factoring partner. But these 5 are definitely important and will help you to understand exactly what to expect.
The answers to these questions together help freight brokers determine the compatibility of a factoring company with their business goals, current financial situation, and risk tolerance.
These factors are so important for informed decision-making and a successful, long-term partnership with the best freight factoring companies.
Freight broker factoring is heavily used in the logistics and trucking industry. There are hundreds of factoring companies and many that specialize in freight brokerage, trucking, and logistics. An integral part of the trucking industry, freight broker factoring companies offers essential cash flow solutions for both startups and established brokerages.
For a small fee, factoring companies provide freight brokerages with healthy cash flow. They are great options for new freight brokers who want to build consistent cash flow to cover day-to-day operations.
As the growing demand for factoring companies increases, it is more important than ever to know what qualities are found in the best freight brokerage factoring companies. For you as a freight broker, factoring has great advantages and is worth the investment. But finding the best factoring companies can take a lot of time to do research.
After reading this comprehensive guide, you should have a clear understanding of what freight broker factoring is, how to leverage it effectively to grow your freight brokerage, and what factors to consider when choosing the right factoring company for your freight business.
So if you are a freight broker, truck broker, or logistics broker here’s a link to our FREE Top 10 Freight Broker Factoring Companies list to help you get started.
Owner, Freight Broker Boot Camp