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Do Freight Brokers Use Factoring Companies?
Freight brokers have to be up to speed when it comes to paying for their carriers and running their business. Factoring companies can help freight brokers give faster payments to their carriers and still be ahead of the curve when it comes to their other business costs.
Do freight brokers use factoring companies? Yes. Freight brokers who use factoring companies are able to pay their carriers right away. The factoring company gives money to the freight broker. Then the factoring company collects the payment from the freight broker’s client.
This exchange of payments can help a freight broker manage the happiness of their carriers and not have to worry about when their clients will release their payments. So, what are some benefits of using a factoring company?
A Freight Brokers Use Of Factoring Companies
As a freight broker, you will need to have a reliable stream of money coming in to help support your business. Some freight broker clients will pay their invoices between 30 and 60 days. A factoring company takes the stress away from you, to help make sure that any freight bills due you can be handled in a timely fashion.
Factoring invoices are becoming more popular for the freight broker and carrier relationship. Carriers are directed towards different factoring offers every day from the increase in competition.
If you have a great factoring company to back you up, carriers can get their payments in a 24-hour window upon completion of a shipment. Faster payments build a strong relationship between the carrier and the freight broker. This can also build a stronger relationship between the freight broker and factoring company as the more your business grows the more funding you could receive.
Even though factoring companies have their benefits, they also have a downside to them.
Pros and Cons of Factoring Invoices
Factoring companies can be a great choice to start with for your up and coming freight broker business. There are benefits that will help to gain profits and keep them. Yet, be careful of some of the red flags you may be looking over.
Benefits Of Using a Factoring Invoice
Factoring invoices gives you more benefits than you can imagine. Factoring can help small and big businesses manage their company well. Those benefits include:
- Instant Payment: You are able to pay your carriers on time and the expenses for the company in a timely fashion.
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- Payment Terms: Even though your clients may want to pay you in that 30 to 60-day range, you have the opportunity to offer your own payment contract. The invoices you provide to your clients can be given to the factoring company so that you can receive early payments.
- Credit Management: Factoring companies can review your client’s credit reviews. This is a task you will not have to worry about doing. Also, for your company, you can keep increasing limits if you start to gain more clients.
- Payment Collateral: There is no need to put up any of your assets to get a line of credit with the factoring company. All they need is your factoring invoices and nothing more.
- Small Businesses: Using factoring companies is great for small businesses. The factoring companies do not require to see your monthly income to know they will receive their profits.
Disadvantages Of Using a Factoring Company
Some offers from a factoring company may seem wonderful, but there are disadvantages to using a factoring invoice that include:
- Solves one problem: Factoring can fix any immediate money problems you have. However, that is the only problem that factoring can fix. Do not use a factoring company to solve any other problem.
- Customers are involved: The factoring company that you pick will contact all of your clients. If your clients are paying late on their invoices, your factoring company has the right to contact them.
- No bad debt: Should your client choose not to pay their invoice at all, it would not be wise to go to your factoring company to handle it. Some freight brokers mistake factoring companies as a collection agency. The debt will return to your business so that you will have to handle it.
- Too much work to maintain: In order for you to gain an advance on your line you must gather different documents. These documents include all of your invoices and scheduled accounts that need to be sent to the factoring company.
Factoring companies give freight brokers a chance to catch their breath. Next, you will need to know the rates that factoring companies use to factor an invoice.
Invoice Factoring Rates
Using a factoring company would be a better option for you than taking out a business loan with a high-interest rate. However, factoring companies do charge fees for their services. These companies have rates that fall between 1% and 5%. The larger your monthly amount is factored the lower your fees can be. Factoring rates depend on the following:
- How big each invoice is that you need to be factored.
- The industry you are in.
- The type of credit your clients have.
- How long it takes your clients to pay.
- How much your carriers are bringing in that you want to factor.
Flat Rates and Variable Rates
A flat-rate plan can be put in place by some factoring companies that include a one-time fee that they will make you pay at the beginning. Factoring companies that do this will take invoices that will be paid within 90 days. When you pay that one-time fee upfront, it does not matter how long that invoice stays open, it will not change.
This kind of plan can help a freight broker know exactly how much the factoring fee will cost them with each invoice. Even with the profits, a freight broker will make with their company, they still pay the agreed-upon percentage. This will help you to keep and see your profits grow within your company.
A variable-rate structure is used by most factoring companies. The longer an invoice goes unpaid, the more a freight broker is charged. For example, a factoring company will charge you 1.5% in the first 30 days and then as time goes on a 0.5% fee may be added every two weeks the invoice goes unpaid.
Advance Rates
An advance rate takes the percentage amount of your invoice and turns it into money. When you are turning over invoices to your factoring companies, you will no doubt be giving them a large volume of invoices at one time.
The transportation industry sees higher advance rates at 80% and 90%, while more uncertain industries receive lower advance rates between 70% and 85%. So, if your invoices total $20,000 and your advance rate is 75%, you will receive an advance of $15,000.
A general rule of thumb is to make sure your advance rate can cover your business for the time being. That means you may have to restructure where your cash goes before you receive the rest of your payment.
Tiered Rates
Tiered rates can be agreed upon in your contract if you understand when your clients will make a payment to their invoice. Tiered rates start off with a small percentage and that percentage will get higher every ten days or so. Your rate may start at 0.5% and could potentially reach 3.5% by the 90th day if your client does not pay their invoice on time.
That is why it is important to know what questions to ask a factoring company that you are considering partnering up with.
Picking the Right Factoring Company
There are different factoring companies to choose from, but you will need to choose a truck factoring company. This will ensure that you get the best rates from those who understand the trucking industry.
When you begin shopping around the market for a great factoring company to help with your invoices, consider these two freight factoring options:
- Recourse Factoring: This means that the client is supposed to pay for the payment of the invoice and the freight broker is responsible for non-paid invoices.
- Non-recourse Factoring: This kind of factoring allows the freight broker to sell their invoices to the factoring company. This is where the factoring company takes on the credit risks. This will cost you more in the end.
Asking Questions
Your next step is to conjure up great questions to ask the factoring company you are considering. Not asking these questions may leave you scratching your head later.
- “What do their long-term and short-term contracts look like?”: Always read the fine print. You need to know the price points and the length of their terms. While most factoring contracts can last for an entire year, you have the right to cancel with a 60 or 90- day notice.
- “What fees do they charge and are there any hidden fees?”: Every factoring company has different percentage rates and items they will or will not charge a fee for. You should not have to give any collateral or equity in your company. Be wary of minimum-volume fees.
- “Do they offer both recourse and non-recourse factoring?”: A factoring company that may be sketchy will try not to explain non-recourse factoring. It will be nice to have both options available to you for future contracts.
- “When do they file the UCC?”: When you consider a factoring company, they may decide to file a Uniform Commercial Code too early. If you choose not to go with them, this will slow down the process as you must destroy that UCC before filing another.
- “Do they have the capital to grow as you grow?”: Be sure that the factoring company that you are considering has a good number of their own clients. This will show you that they are capable of providing you payments when needed. Look for companies that have been running for a while.
- “What kind of technology do they use?”: Do they have a mobile app where you can send in documents? How can I access my account information? Emailing, faxing and using the mailing system can be inconvenient at times.
- “How is the application process?”: Check with the company to see what their requirements are when taking on a new client. Ask what documents or pieces of information they need to see. If they are stalling your application, chances are they will be slow to give you payments.
Just be cautious about the factoring companies you consider. Make sure they are able to answer all of your questions.
Check Their Reviews
Do your research before contacting a factoring company. A company’s reputation lies in its customer reviews. Check the current reviews first.
Look For Offers
Factoring companies know that they are in a competitive market. Some factoring companies that you are looking at will want to offer:
- Online credit services
- Fuel purchase programs
- Equipment and insurance financing
- Mobile technology applications (smartphone app, trucking software, etc.)
Any good offers that are put out there, can be used to help your business. You just have to take advantage of them. By using a factoring company, you can learn what needs to be done to build up your credit.
How Do Freight Brokers Build Credit?
Factoring companies need to be sure that you are capable of handling your payments. If you are a new freight broker and your company is just now getting their feet up off the ground, there could be a multitude of reasons why you may have been shot down by a factoring company.
- New Company
- Errors in the data
1.New Company
You may be able to call a factoring company that has turned you down to see if they can explain why. This will serve as a loose guide to getting your credit where it needs to be.
They more than likely did not accept your application because your business is not old enough. The following entities will be pulling your credit and it will lower it every time.
- Shippers
- Carriers
- Factoring Company
- Bond Issuers
The reason all of these individuals are pulling your credit, is to see if they can trust you with their loads and their money. Every freight broker has to offer surety bonds by law, which brings into play the bond issuer. Just like the factoring company, they will be looking at your payment patterns to see how long you will be in business.
Still, most factoring companies will work with a newcomer to establish credit. That is why, if you are a new company, factoring companies are your best bet at getting expenses and carriers paid on time.
2.Errors In the Data
Mistakes are always made. Data that was input into their system could have been a part of a wrong form or was meant for another entry, that corrupted your application. This is why it is crucial to ask why a factoring company did not consider you.
If a piece of information is input into the system, this could spiral down into other parts of your data and it will not give you the answer you want from the factoring company.
3.Bad Economy
Factoring companies may be in a bad place if there is a financial crisis. So, make sure you do your research and time it right when you want to enlist the help of a factoring company.
When a financial crisis happens, small to medium business are going to be among the last that the lenders will help. There are too many risks involved during a hazy time such as an economic crisis.
Reputation Starter
As a new freight broker, you want to show off your business. Your reputation is what is going to have factoring companies and others wanting to do business with you. There are several helpful ideas to put your name out there:
- Social media: In these modern times it does not matter what your company is or if you think people will be interested. Get a couple of social media pages going and promote your services.
- Website: With your social media pages, link your professional website. There are free website builders to help get you started.
- Customer service reviews: Just as you would check the reviews of a factoring company, others will do the same to you. Treat your customers in a timely and pleasant manner every time.
- On-time payments: What business you do get, be sure to pay any bills on time. This continues to build up your credit before approaching a factoring company again.
- Transparency: Be honest with your customers and business partners. Be honest on your social media accounts as well. People want to be in business with others who are relatable.
- Great business and personal credit profiles: You may not feel like individuals should look at your personal credit history, but they will. Keep both of your credit profiles in good shape.
- Review credit reports: With your credit profiles, continue to monitor them whenever you are reminded to do so. You never know what can appear on them that will hinder your chances of working with a factoring company.
