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How Factoring Companies Extend Accounts-receivable Financing to Freight Brokers

Factoring companies buy accounts receivable from businesses at discounted rates to give struggling organizations ready cash. The concept actually proves simple to understand, but many people and businesses confuse the term or do not understand the benefits. Factoring works for all types of industries, but the trucking industry uses factoring very often, and factoring companies buy invoices from independent truckers, fleet carriers, and other transportation services. Capital companies have increasingly extended their services to include freight brokers.

Understanding Factoring

Finance companies buy accounts receivable, essentially transferring the obligations from the original companies to the factors.

  • The companies get their cash right away.
  • Factoring transactions constitute sales, not loans. The factors own the invoices and legal collection rights.
  • The factors bear responsibility for collections, billings, adding interest charges, and pursuing nonpaying customers through legal actions.
  • Borrowing money would require the original company to collect its debts, but factoring sometimes eliminates this obligation, depending on whether the contract stipulates recourse or non-recourse factoring.

Factoring Freight Bills for Freight Brokers

Transportation companies often choose factoring because of the particular problems they face getting credit. Startup companies often have all their capital invested in equipment, which already serves as collateral for loans. Banks do not accept accounts-receivable invoices as collateral.

Large companies usually choose factoring because they get higher percentages of their invoices and offers protection to factors in cases of debt defaults.

  • Special reserve funds get withheld from the transactions to cover any nonpayments.
  • The original company gets any excess funds after bad debts get paid from the reserve fund.
  • Most large financial transactions come with warranties, guarantees, or collateral protections.

Transportation Factoring

Freight hauling proves complex and demanding, and new carriers and brokers face tremendous difficulties getting credit from traditional lenders. The business cycle often proves unpredictable, and shippers pay slowly, causing brokers and carriers to delay paying their own bills, which causes their credit ratings to plummet.

Freight Brokers Connect Carriers and Shippers

Brokers assume liability for cargoes, and they pay miscellaneous delivery charges and carriers. Carriers need prompt payments to cover gas, payrolls, maintenance, and other expenses.

Brokers serve as intermediaries, and they help shippers find the right carriers for certain types of freight, delivery areas, and logistical services during transit. Some large carriers have in-house brokerage departments, but small and large brokers serve the vast transportation industry worldwide.

Most carriers and shippers use independent brokers because they specialize in matching shippers with the most efficient transportation solutions. Some companies ship goods infrequently, but others ship products daily. Large brokerages handle thousands of loads daily, but smaller firms might operate out of homes or apartments.

  • Brokerage businesses make good profits, but many shippers fail to pay right away, and only large carriers and brokerages can afford to wait for their money.
  • Brokerage factoring helps companies get their money right away, so they can afford insurance, up-front carrier payments, and other business expenses.
  • Small- and medium-sized freight brokers often run on thin profit margins, so slow payments or defaults could prove disastrous.
  • More than 59,000 brokers have registered with the U.S. Department of Transportation, but only about 6,000 qualify for credit.
  • Interest-rate charges usually exceed the costs of selling invoices to factoring companies, so using factors makes sound financial strategies for many companies.

Typical Scenarios for Brokers

Brokers often begin as truck drivers, applying their knowledge and skills in transportation to create viable businesses. Unfortunately, brokering freight costs thousands of dollars, and most shippers pay more slowly than carriers willingly accept. New brokers seldom have several hundred thousand dollars to finance operations, so they must seek other sources for capital.

Factoring allows new brokers to handle larger contracts, so they can pay their carriers and expand their businesses without qualifying for credit. Factoring companies advance anywhere from 90 to 98 percent of the total values of invoices. Some of this money gets held as reserves for recourse factoring, and factoring fees generally range from 1 to 5 percent.

Non-recourse factoring takes many forms, and most people fail to realize that they use these factoring almost every day. Credit cards work on the same principle as factoring. The credit-card companies assume the debts of businesses that accept credit cards, taking on all responsibilities for collections.

Problems Brokers Face Without Factoring Benefits

Freight brokers face many kinds of cash flow problems, and few traditional lenders offer them credit because they seldom have collateral in the form of equipment. Brokers act as intermediaries, putting together carriers with equipment and shippers with freight. Carriers need money right away, and shippers traditionally wait months before paying their shipping bills.

  • Freight brokers must register with the federal government, and licensing creates financial trusts with carriers and shippers.
  • Some brokers use shippers' payments to pay bills other than those associated with the relevant projects.
  • Carriers might not get paid, even though shippers have paid for their deliveries. The carriers can file claims against brokers' bonds or shippers, so some companies could end up paying twice for the same shipments.
  • Credit expenses run higher than factoring fees.
  • Small freight brokerages seldom have the resources to pursue collections and legal actions against shippers that default on their bills.

Broker Factoring Benefits

Many freight broker factoring companies require that brokers match payments accurately between shippers and carriers. When brokers use factors, they keep better records and remain compliant with federal regulations. Small companies enjoy freedom from trying to collect past-due invoices, and factoring fees run less than collection expenses and interest rates on business loans. Other factoring benefits include the following advantages.

  • Freight brokers can get funding within 24 hours.
  • Factoring cash advances arrive by wire, direct bank deposits, or credit to fuel accounts.
  • Some factors offer services without minimum invoicing fees, and many firms offer short-term contracts.
  • Brokers can choose to offer only certain invoices for factoring and keep fast-paying clients for in-house billing.
  • Cash advances run from 90 to 98 percent of the values of invoices.
  • Brokers can manage their accounts online 24 hours a day.

Factoring Helps Brokers Grow Their Businesses

Factoring involves no gimmicks, hidden fees, or interest charges. Companies get their cash immediately, and experienced freight-broker factoring companies understand how to make businesses more successful. Brokers that pay their carriers promptly earn better reputations, which help them get higher credit scores. Solid reputations help companies attract and keep more clients. Having the cash to pay expenses allows companies to pursue larger contracts and more lucrative business opportunities.

When shippers pay slowly, some brokers have no choice but to pay their carriers even more slowly. This situation causes credit scores to drop, and quality carriers stop doing business with risky companies. Brokers lose business opportunities and develop more severe cash-flow problems. Each part of the cycle continues to feed the other until many companies get forced out of business.

Factoring simply advances cash and frees companies from collection headaches. Special quick-pay programs, which offer incentives for fast invoice payments, could help reduce factoring fees. Of course, some factoring agencies overcharge for services, but online research of competitive factoring specialists helps freight brokers understand bill factoring, accounts-receivable financing, freight and trucking options, and other information crucial for making informed decisions.

Factoring Companies Act as Business Partners

Factoring companies help speed up payments even when brokers choose recourse factoring. These professionals know how to approach debt collection efficiently. Ignorance of debt-collection regulations often makes small companies nervous about pursuing their legitimate debts. Factors help companies run credit checks on shippers. Some major shippers ignore bills from smaller brokers, but factoring companies increase small organizations' influence with large shipping companies, helping them get paid faster.

Legitimate factors consider their clients valued partners, offering competitive rates, fast service, and help getting paid. Trucking companies need cash for equipment expenses, fuel, and driver salaries and expenses. Freight bills usually take between 60 and 90 days before shippers pay them because they often depend on sales of their products to cover their own expenses.

Banks and traditional lenders seldom finance freight brokers unless they have sterling credit and three years of audited financial data or loan collateral. The 2008 credit crisis has tightened credit for all types of businesses. High interest rates often cost more than typical brokers' profit margins could cover. Independent brokers and carriers increasingly turn to factoring companies to leverage the equity of their invoices. Competition has lowered fees for these services, and factors offer other valuable help with accounting, getting credit information about customers, and speeding up routine collections.