Will Factoring Put Me Out of Business?
Cash flow is the lifeblood of business, especially for freight brokers whose very existence depends on paying carriers long before shipper customers pay on invoices.
In order to compete with the VC-funded brokerage startups, freight brokers are now using factoring arrangements that increase their working capital without eroding their profit margins on loads. Factoring has become a viable option as new products and services have entered the market to lower the costs and risks while scaling up the efficiencies for all parties involved in freight transactions.
Traditionally, factoring invoices has been seen as an expensive last resort by freight brokers. Increased competition in the market and new technology have led some factoring companies to provide a flat fee structure that is as low as 3% of the amount of cash to be advanced.
This brings us to myth 1: factoring will put you out of business.
When brokers’ gross margins are between 8 and 12%, the cost of factoring a freight bill at 3% may appear unsustainable for the long term. The benefits of factoring go beyond gaining fast access to working capital and making fast carrier payments. Companies are also able to use their newfound capital and efficiencies to support new business growth and increase margins on loads.
On the revenue side, freight brokers can offset the cost of factoring by charging carriers 3% or more of the freight bill amount to process same or next-day payments. Others may decide to provide quick pay at a lower cost, or perhaps at no cost at all, to carriers in exchange for lower rates and long-term capacity commitments.
Factoring also gives new brokers who lack a credit history, as well as established brokers who may need to repair their credit, a means to secure capacity from carriers. In this sense, the cost of factoring is really a strategic investment.
Other cost-saving benefits of factoring include outsourcing of billing, collections and payment processes to free up resources to focus on business growth. Brokers can also offset the cost of factoring by eliminating per-load transaction fees they may already be paying to wire money to carriers ($20 to $40), mail a check ($1), and make ACH deposits ($0.25). Labor costs also need to be considered.
As you can see, factoring will not put you out of business. There are many payment and rate options for freight brokers to choose from when conducting business. Beyond making a profit from invoices, brokers can use factoring as a means to build credit for future business endeavors. Both carriers and brokers can benefit from freight factoring in a myriad of ways.
Are you ready to start factoring today? Sign up with InstaPay to factor for a flat-rate fee and get same-day payments. It’s free to sign up and there’s not commitment!