Freight brokers are among the businesses that are commonly denied credit by traditional lenders such as banks. That’s because they rarely have any collateral to speak of. A freight broker is a middleman, who brings together the shippers who want to deliver their freight and the carriers who have the equipment to make the deliveries.
Unfortunately, the freight business does come with an imbalance of sorts for the freight broker. Many carriers tend to demand their money immediately, while shippers usually wait a few months after making the delivery to pay their bills in full. And sometimes the shippers default entirely, and a typical freight broker doesn’t have the financial resources to pursue collection and initiate legal action.
Why Freight Brokers Can’t Get New Loans
Most lenders today demand some sort of collateral if they are to give a loan to small businesses. That leaves freight brokers without any other recourse to get additional funding for operational expenses. This is especially true if:
- Their sales history and previous earnings do not warrant additional borrowing in the eyes of lenders;
- They are a start-up company with no financing base;
- They have uneven or seasonal sales patterns;
- They have bad credit, which makes them ineligible for standard loans.
A freight broker doesn’t really have any collateral—except perhaps their accounts receivable. And that’s where freight broker factoring comes in. As a freight broker you only need two things to be eligible for additional funding. First, your accounts receivable is not currently used as collateral, and second, your shippers have excellent credit.
Advantages of Freight Broker Factoring
Once you partner with a factoring company that’s familiar with your industry, you’ll find that there are many benefits to this business relationship. Of course, the primary benefit is that you no longer have to wait as long to get your money from the shippers. Factoring involves getting an advance on the amount of the invoice (usually about 80% of the value or so), and then you get the rest minus the factor’s fees, when the shipper pays in full. You may even have the option to convert the invoices to a line of credit.
Getting approval for this kind of financing is easy, and setting it up takes only a week or so. With this setup, you can considerably reduce your overhead expenses regarding your collections.
An experienced factor in the freight industry can also provide a lot of extra services. It can pay your carriers and the drivers directly. You may even receive a credit check performed by the factoring company on your new customers, so that you’ll only extend credit for shippers who are prompt at paying their bills.
With this new source of funding, you can take advantage of the spectacular growth projected for the freight industry. According to the U.S. Freight Transportation Forecast to 2024, overall freight revenue is expected to rise by 63.6% in the next ten years. That means the freight industry will be a $1.3 trillion business by 2024.