What is factoring? Pro’s and con’s for freight brokers!

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Written by Dennis Brown former CEO of 5X Top 100 Freight Broker

To many people factoring sounds as complicated as Chinese math but the reality is, the concept is fairly simple.  Factoring is the process of selling an invoice to a factoring company which then advances up to 95% of the money as quickly as 2 days, rather than having to wait 30-60 days for the customer to pay.

So how exactly does factoring work if you are a freight broker?

Step 1: Provide the service and then invoice your customer

Step 2: Provide copy of invoice to factoring company and you can typically have your first installment, ranging from 70-95% of the total invoice, within 2 days.

Step 3: After the factoring company receives payment from your customer, they will pay you the remaining balance minus their fees which typically range from 1.5% to 5% of the invoice’s face value.

Many businesses use factoring as a source of funding when traditional bank financing is not available.  In the logistics industry, I would say the most common users are small freight brokerages and trucking companies that rely on fast cash to help finance their day-to-day cash flow needs.

Carriers rely on freight brokerages to pay them quickly and many times to even provide a fuel advance before the load delivers.  On the other side of the coin, shippers want to hold onto their money as long as possible and may pay you in 30-60 days.  This is the driving reason why factoring has become so popular over the past 20 years.

Factoring Pro’s

  • Provides quick cash to pay expenses and grow business
  • As your business grows so does your borrowing ability
  • Professional credit checking services

Factoring Con’s

  • Costs typically range from 1.5% to 5% so it is more expensive than most bank loans
  • Factoring could scare your customers because payments need to be made direct to the factoring company.

Here are 5 questions every freight broker should ask when selecting a factoring company:

1) What are the monthly minimums?

2) Is this recourse or non-recourse? (Recourse means factor has the ability to resell the invoice back to you if it does not get paid within a certain amount of time)

3) Duration of contract?

4) What are your fees and how are they structured?

5) What kind of service can we expect?

There are many more questions to ask when selecting a factoring partner but these 5 are definitely important and will help you to understand exactly what to expect.

Factoring has become common place in today’s business environment and is heavily used in the trucking and logistics industry.  There are hundreds of factoring companies and many that specialize in trucking and logistics.  If you are a freight broker, truck broker or logistics broker click here to view Google results for a list of providers that specialize in factoring freight bills for freight brokers.

Regards,

Dennis Brown

Owner, www.FreightBrokerBootcamp.com

 

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7 Responses to What is factoring? Pro’s and con’s for freight brokers!

  1. Nancy says:

    Thanks for the share!
    Nancy.R

  2. Patricia says:

    Just   wanna  state  that this is very useful , Thanks for taking your time to write this.

  3. robert cook says:

    I need a little bit more information before I commit. Will there
    be someone to help me along with the program? Is there a
    24 hr. hotline that I can call if I should have any questions?
    Thank you for further information.

    Sincerely,
    Robert Cook

    • DennisBrown says:

      Thank you for asking Robert. The answer is yes we do offer a support hotline via email to all of our members and we
      usually respond within hours but it could take up to 24 hours depending upon the volume of requests. So unfortunately
      no 24 hour phone number to call as that would force me to significant increase the price of the product from a one time
      fee of $98 to much, much more. Hope this helps!

  4. Aida says:

    Its like you read my mind! You appear to know so much about this, like you wrote the book in it or something.
    I think that you can do with some pics to drive the message home a bit, but other than that,
    this is fantastic blog. An excellent read. I will certainly be back.

  5. james politis says:

    I am a former OO transitioning into FB. I can tell you from personal experience that your article is spot on.
    However, I’ve heard that new FB’s usually are rejected by factoring companies due to lack of credit, exp,etc.
    What say you sir?

    PS I suspect that working as an agent for an established FB renders that concern a moot-point.

    • DennisBrown says:

      I am sure there are some factoring companies that do steer away from new FB just like any
      financial institution will shy away from new businesses due to risk but there are companies
      out there willing to work with brokers. As for working as an agent it is a moot point as
      long as the broker you are working with has the capital to finance the business you should
      be all set.

      Dennis Brown
      http://www.FreightBrokerBootcamp.com

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