Timely payment contributes greatly to a smooth and trusting relationship between partners in the freight market. Failure to pay for the services provided is carriers’ and brokers’ worst nightmare. Some failures like this are bad enough they could ruin a business. However, there is a way to resolve the problem if it arises: freight factoring for brokers.
You may feel sometimes like your only remaining option is hiring collectors, but there is a simpler and more civilized way. By using freight factoring, you free yourself from dependence on the cash flow from your customers, and you will never have to let the due date on carrier invoices pass.
Freight brokers factoring ensures reliable business with credit assurance for carriers and shippers. By joining a freight broker factoring program, you enhance the reputation of a trusted freight brokerage company, and you can focus on finding new clients instead of collecting old debts.
Contents:
- What Is Freight Factoring for Brokers?
- Benefits of Invoice Factoring for Freight Brokers
- How Does Freight Broker Factoring Work?
- Typical Freight Brokers Factoring Rates and Fees
- Requirements to Apply for Freight Brokers Factoring
- Conclusion
What Is Freight Factoring for Brokers?
Brokers normally agree to provide load services with a deferred payment of 30 to 90 days on the invoice. However, shippers will sometimes violate even these generous deadlines. In this case, brokers need to ensure their invoices are paid on time as they have obligations of their own to carriers and drivers, not to mention operating costs that have a tendency to snowball. Alternative financial tools, including factoring brokers, come to the rescue.
Freight broker factoring is when a broker legally transfers an invoice to a third party, called “factoring company” or just “factor”, along with the right to demand the money from the shipper. The factoring company pays the broker a cash advance up to 95% of the invoice, minus commission, immediately after shipment and without waiting for the shipper to pay for the services. In turn, the shipper will transfer the money to the factoring company within 30–90 days.
Freight factoring for new brokers is almost an essential if you have recently entered the trucking brokerage business. It helps newcomers to stay on track.
Benefits of Invoice Factoring for Freight Brokers
Freight factoring for brokers remains a high-value service for the freight industry. Below is a list of benefits that this steady trend brings.
Quick Cash Flow
Factoring brokers pay you when you need it, normally the same day after the load is delivered to the consignee. You no longer have to wait for one to three months to receive the payment for work that you have done.
Easy Planning
Cash flow is the most liquid and most important business asset that helps to estimate how much money you have to spend, save or invest to move forward. With freight brokers factoring, you can more easily plan the funds to cover rent bills and pay invoices from trucking companies.
Dynamic Business Growth
With the help of a freight broker factoring program, you can attract more shippers and multiply the number of invoices you factor. Build confidence from consistent cash flow, you can make long-term investments and steadily expand your brokerage business.
More Loads Carried
Working with freight factoring allows the broker to focus on hauling more loads and developing their client base, rather than collecting overdue debts. Bills associated with moving freight, such as salaries, equipment and software upgrades, can now be easily paid on time.
Long-Term Contracts
Building customer loyalty is critical to getting regular trucking orders, timely payments and long-term contracts. Freight factoring for brokers ensures that all parties, including the truck owner, broker and shipper, will benefit from the deal.
Savings of Time and Effort
Freight factoring can save you a lot of time and effort, as factoring companies will handle all accounting work, such as invoicing, follow-up calls, checking on payments and resolving disputes or settling debts. A broker can focus on hauling high-paying loads rather than doing paperwork.
Guarantee Against Non-Payment
The broker always runs the risk of the shipper failing to pay the bill on time or at all. Thanks to a freight factoring program, the likelihood of bad debts is reduced to a minimum. Factoring companies normally run credit checks on shippers at no cost, and you will get a report on whether the shipper is creditworthy and typically pays its freight invoices on time.
Non-recourse factoring is an option if the shipper has an excellent credit history. The factor then charges an extra fee for accepting the full liability for the shipper’s defaulting on the invoice.
No matter what the size of your broker company is, freight factoring will help you to ensure a consistent cash flow and availability of current assets. You will be better able to forecast your income and expenses, and commit time and effort to finding more loads and developing your business.
How Does Freight Broker Factoring Work?
Simply put, freight factoring involves the following three parties:
- Freight broker (creditor)
- Shipper (debtor)
- Factoring company (factor)
The factoring scheme includes several stages, detailed below.
Preliminary Stage
The factoring company checks the broker and the shipper against the criteria of financial solvency. For this purpose, they collect information about the involved companies, the carrier’s reputation as a service provider and both parties’ payment discipline. The factoring company will have access to information about any violations of contracts, sanctions and penalties, and the transparency and legality of arrangements between the broker and the carrier. This information is required for risk assessment.
Paperwork
The broker and the factoring company sign a factoring agreement, which contains the terms of the deal. Some of the key terms include the subject of the agreement, the payment procedure, provision of funds and the right to claim receivables. The rights and obligations of the parties, their levels of responsibility, the duration of the agreement, a force majeure clause, the cost of factoring, and a settlement model are all required.
The Factoring Company Finances the Broker
The carrier provides the shipper with cargo transportation service and informs the factor accordingly. Delivery must be confirmed with documents: the broker provides an unpaid invoice to the factoring company. The factor then finances the broker to a pre-agreed amount, typically 90 to 95% of the invoice value. This usually takes between 24 and 48 hours after submission of the invoice from the broker.
The Factoring Company Receives the Money From the Debtor
After the pre-agreed period of deferred payment (30 to 90 days) has passed, factoring company agents receive a payment from the shipper. If this does not materialize, they will send a claim.
In the case of recourse factoring, the broker is ultimately held responsible for the unpaid debt if the shipper fails to pay the factoring agency.
The Factoring Company Receives the Payment From the Shipper
The factoring company buys the approved invoices from the broker and pays for them, net of the factoring fee, within 24 to 48 hours. When the shipper pays for the load, the full amount goes to the factoring company.
Typical Freight Brokers Factoring Rates and Fees
Factoring rates depend on several factors. Before deciding on a commission, the factoring company evaluates the total value of the invoices, the payment grace period and the debtor’s creditworthiness. Factoring rates typically vary between 95% and 99.5% of the invoice value.
A factoring fee is easier to calculate as a percentage of the value of one delivery. The freight factoring market offers fee percentages that range from 1% to 10%. Depending on the type of factoring and the agreed terms, the factoring fee may be deducted from the amount paid to the broker after submission of the invoice to the factor, or after the factor receives a 100% payment from the shipper.
Requirements to Apply for Freight Brokers Factoring
Before signing a freight factoring agreement, a proper factoring company will get information confirming the creditworthiness of the broker and the shipper, such as the following:
- Credit history
- Business reputation
- Tax or other arrears
- Criminal or fraud charges brought against the founders, managers or the chief account
- Solvency
- Customers, both active and potential
Next, the broker prepares the documents for a factoring application:
- Checklist
- Constitutional documents of the company
- Identities of the founders
- Contract of carriage
- Other documents that factoring companies may require in each specific case
As you can see, it should not be difficult to prepare and submit the documents for a freight factoring application. In case of any issues, the factoring company will provide you with professional advice to walk you through the process.
Conclusion
Freight factoring for brokers is a modern, flexible financial tool that promotes growth and development, and creates new opportunities for all parties involved.
- The broker receives payments for their services without any delay and can pour the money into operational costs or long-term assets.
- The carrier receives a deferred payment within 30 to 90 days, which not every broker can provide, but a factoring company can easily afford.
- The factoring company boosts its profits with fees from every deal.
The key is finding a professional and reliable factoring company. By doing that, many brokers will already avoid the most common financial risks, increase the volume of services they provide and expand their business within a short time and even during difficult periods.
How? Just contact HMD Financial — it is as simple as that. We will help you to experiment with the timing and volume of deliveries, and avoid losing money, so you can earn and invest it in your business growth.
