Factoring is no longer a foreign language in your trucking company office.
By Steven Hausman, Advance Business Capital 

Lesson #4 – Factoring for Brokers

Let’s quickly recap what we learned in Lesson #3.
There are two basic kinds of factoring: Recourse and Non-Recourse.

• Non-Recourse factoring means the factoring company has no legal recourse for default.
• Therefore the seller (the trucker) is not liable for unpaid invoices.
• Non-Recourse is favored by smaller businesses, i.e. owner-operators.
• Non-Recourse is more expensive than recourse.

What Are Freight Brokers?
On to Lesson #4. Shippers and carriers don’t find each other by chance. The indispensable intermediary in their arrangement is the broker, who posts the load and facilitates both contact and contract. Brokers come in all sizes and shapes. Big carriers often have their own brokerage departments. Big shippers—those that don’t have their own fleets—do the same.

Definition:  a freight broker acts as intermediary between shipper and carrier. For this service, the broker is paid a percentage of the shipping fee.

Setting aside industry elephants, most carriers and shippers use independent brokers. These vary from large brokerage firms that handle thousands of loads a day to small operations run out of the ‘office part’ of the bedroom. Large or small, these businesses often need financial help.

Freight Broker Financing
Brokers assume responsibility for carrier payment, as well as liability for damaged or undelivered freight. Freight insurance can cover the second event, but the first—carrier payment—is another matter. Shippers often don’t pay for 30 to 90 days, but only the larger carriers have the wherewithal to wait that long. Most medium to small carriers exist on a thin margin and a major expense is a painful blow, sometimes a fatal one.

For that reason, most carriers want quick, often immediate payment. However, few brokers have ready access to sizeable capital. Banks won’t lend money on the only collateral a broker can offer, the shipping invoice. The broker is caught in a squeeze. If he can’t provide immediate payment, he can’t get a reliable carrier.

The Factor’s Role
This is where the freight factor comes in. Factoring is a business set up to advance money for invoices. Factors exist in most industries but they’re especially common in trucking. Factoring goes by various names, such as invoice discounting or accounts receivable financing, but the transaction is the same. The factor buys the invoice from the seller, whether that’s a carrier or a broker. Notice that this is a sale, not a loan. The factor assumes responsibility for billing and collecting the debt.

Of course the factor doesn’t pay full value for the invoice. It deducts a percentage, the amount depending on circumstances. In return the broker gets most of his money right away, which he uses to pay the carrier. (The carrier accepts the reduced amount as the cost of immediate payment.)

You can see the broker’s problem. Between the factor and the carrier, his margin is razor thin. On the other hand, his overhead is minimal, mainly payroll. As a broker, if you’re enterprising and careful you can make a good living, but it’s absolutely vital to deal with factors you know and trust.

Likewise, the factor has to know and trust you. How carefully do you check your shippers’ credit? Do your carriers have reliable delivery records? Can you be counted on for regular business?

This last is especially important. Like any business, factors adjust their payments for volume. In fact, a common arrangement is for the factor to take over a firm’s entire accounts receivable. This has its risks but it can be a godsend for small shops, letting them focus on brokering and not billing.

Takeaway
There’s the bell! Here’s your takeaway for this lesson.  

• Brokers are the connectors between shippers and carriers
• Brokers assume liability for freight delivery and payment
• Brokers must be able to provide carriers with immediate payment
• The great majority of brokers need access to outside capital, which is usually provided by factoring companies

As with carriers, factoring can be a good deal for brokers, but of course not always. Whether you’re a driver, owner, broker or just learning the ropes, stick with this course and you’ll learn how to make factoring work for you.  See you next class!

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