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The Ins and Outs of Factoring

07/31/09

Permalink 12:08:02 pm, Categories: starting , Tags: factoring

Financially speaking, a freight brokerage can be a very rewarding business. When first started, however, it can be very challenging to keep your cash flow positive. The situation is compounded if you are forced to pay a carrier or two for loads that you have yet to be paid for. Your customers may not have paid you yet, but in order to keep your carriers happy, you need to cough up the dough now.

So you have a situation. Unless you are independently wealthy with a nicely padded bank account, you will need to come up with a source of financing that you can use in a pinch. Banks are unlikely to offer much assistance to a start up business without substantial assets.

Enter the factoring company. Factoring companies provide immediate money for your freight bills, at a price.

The relationship between you and your factor typically works as follows:

  • As you bring on new customers, you submit their information to your factor. The factor will run a credit check on them to ensure that the customer is a good risk for them.
  • As freight is delivered, you bill the customer, typically using the factor’s address as the remit-to address.
  • Copies of the invoice and freight documents are also sent to the factor. The factor, usually within a day or two, advances you the amount of the freight bill, minus their cut (typically around 2% - 6% of invoice amount).
  • When the customer pays the factor, the transaction is considered settled. Should the customer not pay in a pre-determined time frame, the amount advanced will be payable back to the factor.

Some factoring companies will only advance you 60% to 90% of the freight bill amount upon delivery, and the balance upon customer payment. Some will allow you to pick and choose the invoices you factor, others require you to factor all of your invoices. Some may offer other perks to get your business, such as quicker payment, payroll services, etc.

Due to these differences, as well as a variance between the fees charged by different factoring companies, it’s a good idea to shop around prior to choosing a factoring company.

As you can see, factoring could be a good alternative way for a start up brokerage to get fast cash until profit margins have created a buffer in the bank account. It’s much quicker and easier than talking to a bank about a line of credit, and has the added advantage of growing automatically as your receivables grow.

The trade off is that the fee you pay to the factor can cut deeply into your profits, and it can be hard to wean yourself off this without much discipline.

TruckMaster has a few factoring companies on our industry links page, if you’re looking for a place to start searching from.

Greg Dodson
TruckMaster Solution Provider
TruckMaster Your Freight Brokerage

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