Are you looking for freight broker factoring to solve your cash flow problems? You’re not alone. In fact, most freight brokers and even smaller firms experiencing significant growth can struggle with liquidity. Between establishment costs and waiting for your clients to pay their invoice after you’ve processed their load, it can create a significant financial burden.
Freight broker factoring can provide you with a solution to that challenge, and even offer stability and the opportunity to grow your business. What is freight broker factoring and how does it work? What can it do for your business? First, we’ll explore what freight factoring is, and then delve into other topics.
What Is Freight Broker Factoring?
If you’re not familiar with the term “freight broker factoring”, don’t fret. You may know this financial tool by another name – accounts receivable factoring, invoice factoring and invoice financing are just some of the other terms used to describe it. In all cases, it comes down to the same thing.
Factoring is not conventional lending – there’s no new debt incurred here. In fact, to answer the question of what is freight broker factoring, you need to look at the other end of the spectrum. It involves selling an asset and recouping cash, rather than borrowing money. In this case, the asset is an unpaid invoice.
You sell that unpaid invoice to a factoring company. The company then provides you with a cash advance to help with your liquidity problems, and re-bills the customer. So, your client will now pay the factoring company, instead of you. Once the bill is paid in full, the factoring firm will pay you the balance of the invoice, after subtracting a small fee for their services.
As you can see, the answer to the question of what is freight broker factoring is actually pretty simple and easily understood. However, there are a few important details that you’ll need to comprehend before you start selling invoices. We’ll discuss those below.
What Is Freight Broker Factoring – Important Elements to Know
There are several important topics to cover in discussing freight broker factoring that will ultimately affect your overall experience. We’ll cover these and then expand our discussion to include further topics of importance.
The Advance Percentage
One of the first things we need to discuss here is the advance – it’s not a set amount. Instead, it’s a percentage of the invoice’s total, and is also partially based on your client’s creditworthiness. In general, factoring companies offer between 70% and 90% of the invoice total. The worse your client’s credit history, the lower the advance percentage will be. In some instances, the risk might be too great, and the factoring company will not buy the invoice at all.
The Factoring Fee
Freight broker factoring is not free. To provide you with this service, factoring companies will charge a fee. It’s taken off the remainder of the balance (called the reserve) after your client pays the bill. It usually comes to between 1% and 5% of the invoice total.
Some factoring companies require that you sell a specific volume through them. If you’re experiencing significant growth, this might not be a problem. However, if you operate a new factoring company, it might be a challenge to meet that minimum requirement.
In all instances, this requires a long-term commitment and a contract of at least one year. It also often means that you must sell all of your invoices in order to meet that minimum requirement, which can ultimately cost you money if you’re forced to sell invoices for clients who pay early.
Many freight broker factoring companies charge additional fees. These range from important fees to hidden charges. You’ll find account maintenance or management fees, registration or activation fees, minimum volume fees and more.
Obviously, these charges will reduce the value you see from selling the invoice so it’s important that you’re able to compare different factoring firms and choose one that is transparent about their fee structure. Other fees that might be assessed include:
- Setup fee (also called an activation fee)
- Transaction fee (charged per deposit or per wire transfer)
- Credit check fee (charged for checking the credit of potential clients)
- Termination fee (charged for early termination of a contract)
The benefit for working with a freight broker factoring company is fast cash. However, understand that the approval time can vary greatly. Many firms can offer approval within 24 – 48 hours. However, some can offer faster approval, particularly if you’ve worked with the particular client before. Some companies do require a five-day waiting period with new clients, though. Knowing the amount of time you’ll have to wait can help you compare your options.
Recourse and Nonrecourse Factoring
In answering the question of what is freight broker factoring, you need to determine whether the company offers recourse factoring, nonrecourse factoring, or is capable of providing both options. While each falls under the heading of factoring, they’re different. With recourse factoring, you will be held responsible for repaying the advance if your client doesn’t pay. With nonrecourse factoring, that’s not the case, and the factoring firm assumes all risk.
Now that you’re more acquainted with some of the more important terms involved in freight broker factoring, it’s time to consider some of the advantages that you’ll see with the right factoring company.
What Is Freight Broker Factoring Good For?
With the right factoring company, freight broker factoring can offer quite a few advantages, fostering stronger growth and better stability within your business.
Access to Important Services
While the primary benefit of working with freight broker factoring companies is fast access to liquid capital, you’ll also find that factors specialising in the trucking industry can deliver important services that add value and save you both time and money. For instance, fuel discount cards are commonly offered to help you save a significant amount of money at the pump.
Some companies can also offer fuel advances prior to the primary advance when a job is completed and the client is involved. Finally, many can also offer billing and collection services to reduce the need for you to handle administrative tasks on your own.
Reducing Risk with New Clients
Factoring companies run your clients’ credit prior to approving the sale of the invoice. This is to reduce their own risk. It makes sense – your client’s ability to pay and history of past payments will determine whether or not purchasing the invoice is a good decision. While this is primarily done for their benefit, it also helps you by reducing the risk that you’ll take on a client who will ultimately fail to pay at all.
No Credit Needed
If you run a new trucking company, chances are good that you either have no credit, or what credit you have has been tapped out by start-up costs. With factoring, there’s no need for credit, as the entire process is based on your clients’ creditworthiness, and not your own business’. Companies with low, slow, no or bad credit can still be approved for freight broker factoring.
If you’ve been paying attention, you’ve noted that we preface many points with the phrase, “the right factoring company”. There’s a reason for this. While Canada is home to quite a few freight broker factoring companies, not all of them are ideal for your needs. In fact, some of them have predatory practices that can actually harm your business. Obviously, it’s important that you make a sound decision when it comes to your factoring partner. In the following section, we’ll cover some of the most important questions to ask a potential factoring partner.
What Is Freight Broker Factoring – Questions to Ask before Signing a Contract
When it comes to answering the question of what is freight broker factoring, the general answer is that it is a powerful financial tool that can offer stability and the potential for growth. However, that only works if you choose a reputable factoring firm. In this section, we’ll discuss some of the questions you need to ask prospective partners and why their answers matter.
1. What fees do you charge factoring clients?
This is important because many factoring companies are not transparent about their fee structure. Some charge fees for additional services, but do not make this clear upfront. Others assess hidden fees that are only explained in the contract’s fine print. In all instances, hidden or unexplained charges reduce the value of factoring to your business.
2. Do you require a long-term commitment?
Some companies allow you the freedom to decide for yourself what invoices you’ll sell. This offers flexibility and will ultimately save you money over time. Some invoices don’t need to be sold because the client pays swiftly. In other instances, you might have enough capital to see you through comfortably until payment is made. However, some companies require that you sign a contract that might last a year or longer, which stipulates that you must sell a specific volume or pay a penalty.
3. What is your financial position?
It can be beneficial to find a freight broker factoring company that you can work with over a long period of time. This allows you to build a relationship with them, and develop mutual trust and respect. However, if the factoring firm is on shaky financial ground, then there’s a chance they won’t be around when you need them. This leaves you in the position of having to start your search for a factoring partner over from scratch.
4. Do your additional services cost extra?
Access to additional services, like credit checking, billing, collections, discount fuel cards and fuel advances is important, but you need to make sure that you’re not paying extra for them. Many factoring companies offer these as free incentives to work with them, but some do charge a premium for some of their services.
5. Do you have experience in the freight industry?
It’s important to realise that while some firms are upfront about the fact that they’re generalists, not all of them are. Some will claim to be experts in the segment, but may have only worked with a handful of trucking companies in the past. Generalists have their place in the overall factoring scheme, but as a trucking company owner, you really need to work with a company that has years of experience in your industry.
6. Can I speak to past or current clients?
It can be difficult to assess the reputation of a freight broker factoring company on your own. Ask to contact current and past clients to learn more about their experience, what you can expect with the factoring company and other information. If the company cannot provide references, or refuses outright, it is best to look elsewhere for a partner.
The answers to these questions will help you determine whether that particular factoring company is a good fit for your needs. Once you have answers from one company, move on to the next. You’ll need to compare several in order to find a reliable, trustworthy partner that does not charge excessive fees and that offers the flexibility you need. Conducting this research can be time consuming and frustrating, forcing you to stop running your business in order to compare potential factors. However, it’s vital that you do your due diligence. There’s also help available.
We’re Here to Help
We have years of experience in helping our clients connect with freight broker factoring companies, and answer the question of what is freight broker factoring and how it can benefit their business. We invite you to schedule a free consultation with one of our factoring specialists to learn for yourself how simple it can truly be to foster growth and stability within your business.