Debunking the Myths of Freight Factoring

New Technology Helps Brokers Increase Margins

Sam Bokher | InstaPay

Cash flow is the lifeblood of business, especially for freight brokers whose very existence depends on paying carriers long before shipper customers pay on invoices.

Fleets that operate five trucks or less comprise 86% of FMCSA-registered motor carriers. Small fleets are the bedrock of capacity for brokers and prefer doing business with those who pay within 15 days, and perhaps 10 days or less, to cover their operating expenses for loads that include fuel, driver payroll and equipment maintenance.

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Recently, carriers’ expectations for quick payments have increased, partly due to the number of well-funded technology startups, or “digital freight brokers,” that are offering same- and next-day payments to carriers to secure capacity in a tight market.

In order to compete with the VC-funded brokerage startups, freight brokers are now using factoring arrangements that increase their working capital without eroding their profit margins on loads. Factoring has become a viable option as new products and services have entered the market to lower the costs and risks while scaling up the efficiencies for all parties involved in freight transactions.

Below are three common myths that have been dispelled by modern factoring solutions.

Myth 1: Factoring Will Put You Out of Business

Traditionally, factoring invoices has been seen as an expensive, last resort by freight brokers. Increased competition in the market and new technology have led some factoring companies to provide a flat fee structure as low as 3% of the amount of cash to be advanced.

When brokers’ gross margins are between 8% and 12%, the cost of factoring a freight bill at 3% may appear unsustainable for the long term. The benefits of factoring go beyond gaining fast access to working capital and making fast carrier payments. Companies are also able to use their newfound capital and efficiencies to support new business growth and increase margins on loads.

On the revenue side, freight brokers can offset the cost of factoring by charging carriers 3% or more of the freight bill amount to process same- or next-day payments. Others may decide to provide quick pay at a lower cost, or perhaps at no cost at all, to carriers in exchange for lower rates and long-term capacity commitments.

Factoring also gives new brokers who lack a credit history, as well as established brokers who may need to repair their credit, a means to secure capacity from carriers. In this sense, the cost of factoring is really a strategic investment.

Other cost-saving benefits of factoring include outsourcing of billing, collections and payment processes to free up resources to focus on business growth. Brokers can also offset the cost of factoring by eliminating per-load transaction fees they may already be paying to wire money to carriers ($20 to $40), mail a check ($1) and make ACH deposits ($0.25). Labor costs also need to be considered.

Myth 2: Factoring Is All or Nothing

Factoring companies have traditionally had monthly volume requirements for brokers. This model has changed, as some companies now allow clients to choose the particular loads they want to accelerate payment on.

In addition, some factoring companies offer free credit checks as a service to provide brokers with advance notice of whether or not they will be able to factor loads from a particular shipper.

To choose which loads to factor, a freight broker could print a select group of freight bills from its accounting system. The bills and corresponding proof-of-delivery documents can then be scanned and uploaded to a factoring company’s online portal.

Alternatively, data integrations between the online platform of factoring companies and the transportation management systems (TMS) of brokers can eliminate the printing, scanning and uploading process. Loads that a broker wishes to factor can be selected directly from within the TMS.

Once the documents are uploaded, brokers can receive electronic payment in their own bank accounts on the same or next day, depending on the time of day the transaction was completed.

Myth 3: My Rate Is Already the Lowest

Increased competition and market demand have lowered the cost of factoring and given brokerage firms the means to offer quick payment to carriers at lower costs to secure capacity.

When evaluating low-cost factoring arrangements, freight brokers will find that some companies have low rates that come with additional transaction fees, such wiring payments to carriers.

Factoring companies that operate the most efficiently can provide flat fee structures with no hidden charges and assume all of the risk for collections. New technology has enabled factoring companies to more efficiently manage freight bills and monitor various data sources to proactively detect lending risks, which is essential to offer lower costs and no hidden fees.

Factoring has traditionally been viewed as a last resort for freight brokers to access working capital quickly to stay afloat. New services are now available that offer low, flat fees with no hidden costs, which have made it possible for brokers to use factoring as an essential, strategic tool to support business growth and compete more effectively for truck capacity.              

Sam Bokher is Director of Operations for InstaPay, a factoring company providing financing alternatives for growing brokerage companies, headquartered in Austin, TX. He can be reached at
info@getinstapay.com.

Photo credit: Best Vector Elements/Shutterstock.com