Being a freight broker is not for the faint of heart. Customers may take 30 to 60 days to pay their freight bills (if you’re lucky); however, you have to pay your drivers quickly. Sometimes drivers or trucking companies even require payment upfront for gas and maintenance. This forces brokers to tap into their cash reserves.
Sadly, pressure on cash flow increases in periods of high growth, so success can actually lead to bigger problems. Traditional bank financing is not available to many freight brokers due to a lack of collateral and/or fluctuating profitability.
To stay in business, you need to plan ahead, avoid mistakes and consider alternative methods to get paid faster so you don’t use up all your cash reserves.
Strategy 1: Don’t Take Unreliable Customers
Generally speaking, there are two kinds of slow-paying customers. Slow but reliable customers are usually large companies that insist on paying invoices on net-30 to net-60 day terms. They are often excellent clients, making it worth it to accept their terms, but their slow payments can hurt your cash flow in the short term. Slow and unreliable customers come in all shapes and sizes and they typically extend way beyond payment terms. Sometimes they never pay and become a collections problem. Avoiding unreliable customers is the best strategy for avoiding a cash flow problem.
The easiest way to avoid unreliable customers is to run credit checks on all of your clients, including long-term clients. Remember, as a freight broker you are extending credit just like a bank to any shipper with which you work. A commercial credit check can provide you with info such as the company’s current payment trends, past payment record, prior bankruptcies, and any legal issues they’re currently facing. If you see problems, you can request partial payment up front, get collateral such as a personal guaranty, or avoid the risk. I’ve seen it many times where brokers go out of business when one significant customer doesn’t pay and the losses from that relationship overwhelm the broker’s financial position.
If you do find yourself working with an unreliable customer, make sure to handle payment problems quickly. The longer a company goes without paying their invoice, the less likely you are to be able to collect on it. Make sure to follow up on any overdue invoices quickly and politely, and consider consulting with a collection agency on any invoices over 30 days late.
Strategy 2: Quick Pays
Many shippers will agree to a “quick pay,” which is an invoice with a shorter due date than the typical 30 to 60 days. Shippers generally agree to a quick pay if the broker can offer them a discount for paying quickly. Although you earn less profit with a quick pay, the amount is likely less than you would have to pay in interest to borrow the amount of the invoice, so financially you are better off.
It may be better to invoice the full amount with standard net-30 terms and then indicate that if they pay early (within 10 to 15 days) they will then get the discounted amount. If they don’t pay early but only pay the discounted amount, it is critical that you act immediately to collect the remaining balance. Otherwise your customer will take advantage of you and you will end up with lower profit and still have cash flow pressure.
Strategy 3: Freight Factoring
Freight factoring sounds complicated, but is actually quite simple. With freight factoring you are simply selling your unpaid invoices to a third party. The steps are easy: you provide your service and invoice the customer. You then give the invoice to the factoring company. You are generally paid 70-95% of the total invoice within two days. After the factoring company receives payment from your customer, you will receive the rest of your balance, minus the factoring company’s fees. Fees can range between 1.5% to 5% of the total invoice.
While 1.5% doesn’t sound like much, if you use factoring all the time, that 1.5% can represent an 18% annual interest cost. For example, if you factor $100,000 every month, then that is $1,500 a month in factoring fees. If you choose to do this monthly for a year, that is $18,000 in factoring fees to get $100,000 up front, an implied interest rate of 18%. If you are paying a 5% factoring fee, that’s a 60% interest rate if you are doing it regularly.
Another key issue is whether your factoring arrangement is non-recourse or recourse. When you factor on a recourse basis, if the customer never pays the invoice, the factoring company requires the broker to return the initial advance. In this case, the broker keeps the risk of non-payment. In non-recourse situations, if the customer never pays the invoice, the factoring company is the one that loses out. They can’t come after you to get their money back. Of course, the fees for non-recourse factoring are higher when compared to recourse factoring because the factor is taking the financial risk of non-paying customers. You typically find that the factoring companies will also be more selective on which invoices they will allow you to factor as they want to limit their financial exposure to the broker’s riskier customers.
You may also get a lower rate if you agree to factor all of your invoices. While the rate is lower, your total cost could be much higher than if you have a ‘spot’ factoring arrangement where you decide which invoices to factor based on when you need to speed up cash flow.
Factoring can provide quick cash to pay expenses and help you grow your business. On the other hand, the percentage taken by the factoring company is most likely more than a traditional bank loan. If you are a smaller broker, looking to factor less than $30,000 a month, you may wish to look into accounts receivable financing instead. Accounts receivable financing is a similar concept to invoice factoring, but is more flexible for smaller businesses.
Factoring has become very common in both the logistics and the trucking industries. There are literally hundreds of factoring companies. As with any industry, some will be trustworthy and others will not. It’s important to thoroughly vet any factoring company you use just as you would any lender or client.
Strategy 4: Constant and Clear Communications
One of the most important factors to managing a successful freight-brokering relationship and getting paid is to keep the lines of communication open and honest. Unfortunately, there are unethical freight brokers who have formed multiple brokerages over the years, only to close them down when they’ve pocketed lots of income while not paying other brokers and carriers. They start off legitimately to get others to give them larger and larger amounts of credit as they provide repeat business and pay in a timely manner. When they are in position to rack up a lot of business in a short period of time, that’s when they start to slow pay or not pay at all. They keep going as long as they can and then when they owe too much money and no one will work with them, they simply disappear. Then they pop back up a year or two later in a new location, with a new name and start the process all over again.
This behavior hurts the entire industry. For reputable brokers, it’s incumbent on them to demonstrate their credibility and communicate regularly with their customers. It’s also important that they thoroughly vet any employees before hiring. Employees who have access to their database of shippers and trucking companies can do a lot of damage to both a broker’s reputation and the reputation of the industry as a whole.
Solving cash flow problems are important in any business, but especially so for freight brokers. Being a broker almost guarantees that you will have money going out before money comes in. Strategies like invoice factoring and arranging for quick pays can help ease these difficulties, as can following best business practices.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing and international business leadership experience, including a role as president/owner of a custom fiberglass manufacturer. He provides business planning and consultation to a variety of manufacturing companies.