There is an aura of complexity surrounding freight broker factoring. Despite that, there are a lot of significant reasons for brokers to use a factoring service and benefit from an ideal partnership that can help them expand their business and maintain their cash flow at high levels. We are going to delve deep into the world of freight broker factoring, help make it understandable and show why it can be just the ticket for you. So let’s take a look at what freight broker factoring is, what are its many benefits, how it works, what are the rates, and much more.
What is Freight Broker Factoring?
The root of why freight broker factoring was created goes back to one simple reason: Some people want their money right away. Factoring, which is a form of financing used by freight brokers and other transportation companies, involves a third party providing the broker with a lump sum payment in exchange for the right to collect the freight invoice due to the broker. The third party then collects the invoice and deducts a finance charge for the service. Freight broker factoring is beneficial as it allows the freight broker to receive immediate payment, eliminating the wait time associated with invoice collection.
What are the Benefits of Invoice Factoring for Freight Brokers?
There are quite a few benefits to invoice factoring for freight brokers. Here is a list of some of the perks:
- Bolstered cash flow: With the ability to receive payments quickly, the cash flow of brokers is easily freed up for reinvestment into other areas of their business.
- Rising profitability: With the invoices being quickly turned into payments, brokers can increase their profits faster by not having to wait on payments.
- Cutting overhead costs: By handing over the duties of tracking down the payments to the factoring service, the broker now has a cost-effective way to manage accounts receivable while also eliminating the time and resources that often have to be put in to garner a payment.
- Risk is reduced: Factoring services guarantee payment on invoices, reducing the risk of nonpayment and providing a cushion against potential losses.
- Quicker access to working capital: The process allows your business to have fast access to working capital. With that already-in-hand capital, freight brokers can use it to finance new enterprises, expand operations, or invest in new technology.
- Improved credit standing: Freight brokers can build up a positive credit history as payments from factoring services are reported to credit bureaus. A better credit rating means better financing options for future endeavors.
What is the Process of Freight Broker Invoice Factoring?
Freight brokers need a consistent stream of money coming in. That can be hard to attain when they are waiting sometimes as much as 90 days to be paid by the customer. Freight broker invoice factoring can solve that by turning unpaid invoices into cash for operating expenses and business growth. Let’s take a look at the typical freight broker invoice factoring path:
- Unpaid invoices are submitted: Factoring companies, which are also known as factors, take in all types of unpaid invoices but prefer invoices from creditworthy customers and medium-sized or large-sized companies. Some factors will not take invoices for customers who consistently make late payments. The usual turnover time of invoices is between 30 and 90 days.
- Cash is paid out to the freight broker: Factors pay out the invoice value minus a percentage between 24 and 48 hours after submission. Some factors will pay out within a few hours for a slightly higher percentage. In freight broker factoring, a portion of the cash advance is usually deposited to the carrier to ensure they are paid before transferring the rest to the freight broker’s account.
- Settling outstanding invoices: The factor helps in payment collections by having a place where all customer payments can be made and by reporting repayment progress online. If there is a problem, the factoring company will work with the shipper to resolve disputes professionally so good working relationships are maintained.
- Paying out the remainder: Once the customer has sent the payment, the factoring company will deduct its fee and send the remainder of the invoice value to your company.
What Types of Credit Checks are Performed When Factoring Freight Bills?
It’s typical for lenders to perform credit checks to assure a company has financial stability before going about the freight factoring partnership. Credit checks review the company’s payment history, public records, and legal filings. There is usually no minimum credit number to receive approval; credit checks are almost always done to check for financial crimes. Lenders may also do a personal credit check — which reviews a person’s credit score, payment history, and financial resources — to evaluate the financial health of that person. The payment history, credit rating, and other financial data of the trucking company that is providing the freight services might also be checked.
What Can I Use my Factoring Advance For?
So now that you have a factoring cash advance and some quick working capital, what do you do with it? The answer is you can do a lot with it. For many, the new cash helps cover expenses, such as fuel, payroll, and other operational costs. But that isn’t the only area that can benefit from the money. Other possible uses include buying new equipment, investing in new technologies, expanding the business, or purchasing additional inventory. The money can also cover the cost of bid and performance bonds, which are often necessary to participate in government contracts. Finally, the advance can also be used to pay suppliers on time, which is key to maintaining a successful business.
What Businesses Benefit From Freight Factoring?
There are quite a few businesses that can benefit from freight factoring services. The services are often used by transportation companies, including trucking, shipping, and logistics companies. Also, freight brokers, owner-operators, and independent contractors who transport goods can benefit from freight factoring services. They provide companies with quick access to working capital, which helps them cover expenses and ensure a smooth operation. Delays from lack of funds can become a thing of the past and your company won’t have to worry about covering costs for the next delivery on the schedule.
How Does Factoring Stand Up Against Other Funding Options?
Freight broker invoice factoring is not the only funding option. There are other ways to improve cash flow and liquidity — bank loans, merchant cash advances, crowdfunding, angel investors, and private equity funding. Let’s see how they stack up against invoice factoring:
- Bank line of credit: This traditional form of financing can be limited because banks, after examining your credit profile and fixed assets, can often approve a line of credit that is not enough to fully fund your projects. Factoring, on the other hand, is focused on invoice turnover and is a more likely way to come up with the capital to fund your growth.
- Merchant cash advances: The positives of automated clearing house (ACH) or merchant cash advance (MCA) loans are that qualification is not difficult and that it doesn’t usually take more than a day or two to get the funds. But those are countered by high interest and lender fees that can reach up to 60% of your original loan. The inability to pay those advances on time can quickly put you in debt. Invoice factoring is usually safer because cash advances are based on eligible invoices from reliable shippers. The greater certainty that the customer will repay your cash advance allows you to focus on growing your business and not stressing over debt repayment.
- Other options: Crowdfunding and angel investors can be a challenge to access, and often require brokers to give away equity in their business. While private equity funding is another viable option, it's typically the most expensive and comes with the most stringent requirements.
What are the Usual Freight Broker Factoring Rates and Fees?
There can be quite a few variables that determine the rates and fees of freight broker factoring, with the main factors being which service provider is used and what services they offer. The typical rates range between 1% and 5%. Larger factoring companies might offer lower rates than smaller brokers. Other components that can sometimes be figured in are how much you are planning to factor, how long your customers take to pay, how long you have been in business, the diversity of your customer base, and overall customer credit quality.
The fee structure usually also varies. Some factoring companies charge a flat fee, others charge an annual fee, and certain ones may charge by the transaction. It is important to note that some factoring companies may have other additional fees — collection fees, late payment fees, or setup fees — so remember to shop around to find the best prices for your situation.
What are the Requirements to Apply for Freight Broker Factoring?
The requirements for applying for freight broker factoring can vary from partnership to partnership. But most applicants must have satisfactory credit and be able to verify their ability to collect payments from customers. Among the information often requested by factoring companies are an active USDOT/MC number, the required state licenses or permits, a valid EIN, a certificate of authority, and a W-9 on file. Also, applicants must provide financial statements, including a balance sheet that is generally no more than 90 days old. But don’t let that intimidate you because, with HaulPay from ComFreight.com, only your business information and proof of authorization are needed to get approval. No credit checks or company financials are required.
Can You Get Out of a Factoring Contract?
It is possible to break a factoring contract, but that often depends on the type of contract. Most factoring agreements will have a contractual term for some period of time. It is essential that when you are working out a contract you avoid long-term contracts with hard-to-exit provisions.
Most factoring agreements may even have early termination penalties and require you to take on debt on your balance sheet immediately. New innovative options like HaulPay don't have long-term contracts or early termination fees and include more favorable terms that don't create debt on your balance sheet.
ComFreight.com’s HaulPay Can Help You Bring in the Business
Once you understand the intricate world of freight broker factoring, you can see there are quite a few benefits for freight brokers. This in-depth look answered some of the key questions you might have about freight broker factoring — like what freight broker factoring is, how it works, what are the rates, what are the requirements, and more — and pointed out there are partners that can team up with you to use factoring to increase your cash flow and expand your business. ComFreight.com, with its HaulPay system, can be the ideal ally when tackling the factoring service world. To request a demo, visit ComFreight.com’s website.