Running a Profitable Freight Factoring Brokerage

By: Kris Koonar

Owning a freight brokerage business can be extremely profitable, if you can manage to run it successfully. How can you determine that you have a successful freight brokerage business? This is easy. You have a successful business, when you are able to pay your drivers on time; you do not lose business on account of cash flow problems, your balance sheet reflect a fattening bottom line and reputed names keep adding to your list of customers, making it grow bigger with passage of time. This means you have achieved success.

However, in the freight brokerage business things do not move so positively. What usually happens is that on account of poor cash flow, you are unable to pay your drivers on time, which severely hampers your business. The main reason for this situation is slow paying clients. Under norms prevalent in the transport business the practice for customers is to pay freight bills 30 to 60 days after delivery has been made. This puts you in dire straits as far as making payments are concerned, because meeting your liabilities cannot wait till you receive payment from your customers.

If you intend to keep running your freight brokerage business, you need to pay your drivers every week/payday. So, how do you tackle this problem effectively? You factor your freight bills for a small fraction of their value. Factoring gives you immediate access to cash for taking care of your business needs. Your drivers get paid on time, relieving you of the greatest problem affecting your business. As the cash flow problem gets resolved, you are able to concentrate on growing your business.

Once you factor the freight bills of your freight brokerage business, the factor credits your account with 90 to 97% value of your invoice. Factoring envisages purchase of your freight bill at a discount by the factor. This means recovery of payment from the client becomes the factor's responsibility. All administrative liabilities including costs are also borne by the factor, as the factored invoices reflect on the factor's book of accounts thereafter, and not yours. You are free to go about your business having converted your slow paying invoice(s) quickly into cash. It takes only 12 to 24 hours for the factor to credit your account, after he receives the invoices you send for factoring.

To many, bank finance would appear to be a viable option. But, for a freight brokerage business especially if new, this option is practically non-existent. The reason is that banks require proof of profitable business operation for at least a three years period prior to the date of application for the loan. When you have a new business, you will not furnish the required documentation and the bank will deny credit.

However, when you set up a freight bill factoring account, the factor does not look into your credit history. It is the quality of clients that you render service to, which forms the most important part of the criteria for qualification. If your clientele consists of credit worthy customers, who pay on time you have very high chances of qualifying because factoring companies look at your future potential instead of your past history.

The factoring fee is nominal against the tremendous benefits it offers in terms of ready cash, which help to avoid struggle to make essential payments for running your freight brokerage business. The factoring fee usually ranges between 1.5 to 3% of the value of the factored invoice.

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