Are you looking for an alternative financing option, one where your freight brokerage isn’t inexorably tied to banks and credit unions? More importantly, are you looking for a financing solution where your brokerage can immediate pay carriers and not be burdened by the stress of these carriers abandoning your business? If that’s the case, then don’t despair. As a freight broker, your main responsibility includes acting as an intermediary between shippers and carriers and for that to work, you must often prepay the carrier. Your responsibilities for the shipper include defining their needs, outlining their requirements and finding a cost-effective carrier that can deliver on time. Unfortunately, carriers have razor thin profit margins. They can’t afford to wait 30, 60, or 90 days to be paid. They need money upfront and if your brokerage can’t pay them immediately, then they are all too willing to go elsewhere. This is why receivables factoring is so important for today’s freight brokers. It allows them to improve their cash flow, reduce their costs of financing, and most importantly, it allows them to prepay carriers and keep shipments moving.
Large freight brokerage companies typically have the funding, credit history and financing needed to prepay carriers. However, small and medium sized freight broker firms aren’t so lucky. They are literally at the mercy of large banks and financial institutions, ones who are less willing to advance capital in today’s market. Access to cash is essential for your operations. You need it to keep your carriers moving and customers coming back for more. It’s not merely a question of prepaying carriers, but also an issue of maintaining proper cash flow. In fact, many profitable carriers go bankrupt simply because they lack the financing needed to prepay carriers and maintain a positive cash position. So why are today’s banks unwilling to help small and medium sized brokerage firms?
Receivables factoring is sometimes referred to as invoice factoring, receivables financing and or invoice discounting. Regardless of what it’s called, its principles are very simple to understand: Receivables factoring is an asset-based financing option that allows companies to use their receivables in order to set up a working business credit line.
A company’s receivables are one of its biggest assets. Receivables factoring allows companies to use that asset as a form of collateral. They can use their receivables to establish a business credit line, one where each additional receivable is used to secure the working capital needed to finance operations. For small to medium sized freight brokerage firms the benefits are immediate. First, they are able to prepay carriers and ensure that shipments are properly managed on behalf of the shipper. Second, they can improve their cash flow and reduce their costs of borrowing capital. Finally, they can do away with the going concern of financing. Instead of spending an inordinate amount of time searching for financing, they can put the issue behind them and focus on growing their business.
1. How Does Receivable Factoring Work? One of the reasons why receivables factoring is so popular amongst today’s freight brokers is because it’s an extremely easy financing solution to use. Instead of waiting for your customers to pay their invoices, your company sells that unpaid invoice to the factoring company. The factoring company then advances your enterprise a portion of that invoice’s value. This advance can sometimes be as high as 90 percent of the unpaid invoice’s total amount. Earlier invoices garner higher returns as does factoring more invoices with the finance company. If properly managed, your company can reduce the costs of factoring and increase the amount of the upfront advance by factoring more receivables and showing consistency in terms of the amount of business you provide the factor. Each invoice you generate can then be used to secure the working capital you need to prepay carriers, pay creditors and vendors, manage payroll and improve your cash flow.
2. How is the Credit Line Established? Unlike bank financing, the credit line established by the factoring company isn’t based on your credit rating, your credit history or your financial performance. As such, there is no need to provide a cash flow statement, an income statements or a balance statement. The decision to advance your freight brokerage firm money is based on the credit worthiness, credit history and rating of the account debtor, which in this case would be your customer. All you need to do is provide a list of the customers you wish to use factoring with. The financing company will then review these companies and base their decision to advance you money on how well these customers pay. You don’t need to concern yourself with your financial standing. The credit line that is established will act as a loan, but won’t be shown as one on your balance sheet.
3. What Are the Costs of Factoring? There are two portions to the cost of factoring that are bundled up into a discount. An administration cost is applied directly to the total value of the receivable. Next, there is an effective rate that is applied to the advance on the receivable. The effective rate is made up of an interest rate and the going prime rate. This daily rate is applied to the advance and is calculated by taking the number of days it takes your customer to pay their invoice. Receivables factoring differs from bank financing in that you aren’t covering a daily cost of money on the receivable’s total value, but are instead covering a daily cost of money on only the portion of your upfront advance.
By virtue of their business model, freight brokerage companies are guaranteed to have issues with cash flow. It is simply unavoidable. Larger freight brokers have the financing and cash position to prepay carriers. However, small to medium sized freight brokers need help and this is where receivables factoring comes in. It is quite simply the most proactive financing solution available for today’s freight brokerage companies.