Freight broker factoring is not a complex phenomenon; it is quite easy to comprehend. Having done this post you’ll have a clear notion of what it is, how to use it and the points necessary to consider.
Freight Broker Factoring in the outline
Freight broker factoring stands for an invoice selling to a factoring company. Therefore another name is freight bill factoring.
As a method of quick payments it works like this. You sell your freight bill to a factoring company and obtain the next day up to 95% of the sum paid to you in advance. It’s beneficial for you as a freight broker, because you are relieved of the necessity to look forward to your customer’s payment as long as 30-60 days and have sufficient financial base to pay for carriers’ services.
How Do Factoring Companies Work For Freight Brokers
To make it clear how factoring work is done for freight carriers and brokers the process could be conditionally divided in three stages:
Stage 1: Cover your customer’s freight and issue an invoice for the service rendered
Stage 2: Submit the invoice copy to a factoring company to receive your down payment in the amount of 90-95% of the billing sum usually in the next two days.
Stage 3: Upon receipt of the payment from your customer the factoring company transfers you the rest of the payable sum with up to 1.5-5% factoring fees debited from the nominal value of the invoice.
Consider the case below:
Suppose you bill your shipper for a sum of 1,000$. If you do without freight factoring service your customer’s payment will be no earlier than in 60-90 days while with the involvement of factoring support the company gives you an advance in the amount of 900-950$ in the coming day or two.
The freight factoring company keeps 1.5-5% of fee from the shipper’s invoice payment, that is approximately 15-20$, and sends you the remaining.
Raising Cash by Factoring Companies
The invoice factoring is deemed by many entrepreneurs as a means of financing in cases where it is impossible for them to get a bank credit or a loan. To a greater extent this is true for beginners in the freight line. Among the main consumers of factoring provision are small-sized freight broker companies, shipping operators, who privately run the business, and transport carriers who greatly depend on fast cash to maintain their activities.
Factoring has been rising in popularity over the last two decades. The trend is driven by the shipper’s behavior in the logistics chain. They are typically unwilling to pay their money right away to a freight broker and prefer a delay for 30-60 days putting the latter short of funds to pay for fuel so that the cargo is forwarded by transport carriers.
Advantages of Freight Broker Factoring
- Quick source of cash to cover your expenses and develop your business
- Your cash flow goes up along with your business
- Allows all-around and free-of-charge credit assessment of shippers
- Insures ever available cash for carrier charges
- Helps to leverage the issues with your cash flow
- Boosts your operational capital
- Built on your customers’ credit background instead of yours
- Saves you the long wait and abundance of paperwork procedures when dealing with other creditors such as banks
- Makes you assured that your pending debts will be covered
- Offers additional options in immediate payments to carrier companies
Drawbacks Of Involving a Transport Factoring Company
- The common freight factoring fee is 1.5-5% which is much higher than that of a bank credit or a loan
- Factoring poses a difficulty to some customers as they feel reluctant about interference of a third party
- Not an option for shippers who are not going to repay their debts.
Factoring companies have nothing common with collectors.
Freight Factoring Fees
Now that you have learned all pros and cons of freight factoring service it’s high time to advance on to fees and costs.
The fees are variable and can be typical, lowered or flat. The common rate is within 1.5-5% of the invoice value, but the more you resort to factoring the lower fees you may enjoy. Some tend to keep a flat factoring rate, the other range depending on your participation.
Though the traditional bank financing is a less expensive undertaking, the obstacle preventing startup brokerages from applying for a traditional credit is that they don’t have a prolonged interaction history with the bank.
Other factors affecting rates may include:
- The nominal value of the invoice to be factored
- Your market niche in the freight broker industry
- Amount of your client’s credit
- How soon can your shippers pay the invoice
Is Factoring A Perfect Choice for my Company?
Before initiating the collaboration you should be aware whether freight factoring could be suitable for your company.
The positive side of a moment is that there is a huge number of factoring providers to meet your special requirements.
You can select out of the two types: regress and non-regress factoring.
Regress factoring is a method of receivables purchase with reverse appeal to a service provider. It suggests you bear all risks and are posed fully in charge of your shipper’s unpaid bills. That’s why you can use it at a lower cost.
Keep it in mind, however, that regress factoring is not a perfect option when dealing with new shippers and having little knowledge about their profiles.
The non-regress type, on the contrary, grants you, the freight broker, the opportunity to sell your receivables to the factoring company and thus get rid of all responsibilities binding upon you. That is a great favor but you’ll have to invest more.
Building Trust To Freight Brokers
It is a custom with factoring companies to look into your clients’ credit history before starting a deal to prove their paying capability. At the same time they observe your managing payments.
This could be a problem for newly-established brokerages and carrier companies which haven’t yet a solid foundation.
Watch out the following things so you don’t get in situations when a factoring company waives you:
- See to it you pay invoices in due time. That improves your reputation and increases the rate of trust
- Bring to order your personal and business credit profiles
- Keep your own credit history impeccable
- Monitor your credit statements. That way you could improve your own and business standing.
Pursuing Your Best Freight Factoring Companies
You have no insight into how to find your best freight broking company. That’s easy to fix. I would recommend you a checklist of questions to poll yourself when reaching out for the top freight factoring companies:
1.) What are your minimum monthly factored sums? Find it out beforehand to comply with them.
2.) Who would be responsible for your client’s unpaid accounts? Is it a regress or non-regress factoring?
3.) What is the term of the contract?
4) How high are the fees to be charged by the factoring company? Beware of the hidden charges.
5) What kind of service could you possibly get?
This is not a comprehensive questionnaire to find your factoring provider. But the above questions might be decisive for your choice.
To put it in short, factoring appears to have taken its place in modern business surroundings. It is highly popular in transportation and among forwarding companies. The number of factoring providers can reach hundreds with a lot of them being major in logistics, brokerage or forwarding. Factoring comes much of assistance to freight brokers and pays off the charge.
The issue is that you should do a great job trying to find the variant most reliable and suitable for you. Finding a proper factoring provider consumes much time and energy. Should you be a logistician, carrier or a broker, the below reference will help you pick the top ten freight brokerages.