The majority of established freight brokers in the industry partner with a factoring company. Although not required, getting the services of a factoring company is highly recommended in the industry due to a variety of reasons. The concept is fairly simple. If you are a good freight broker, would you rather wait for 30 to 60 days for your shipper to pay you with the added risk of the shipper dishonoring his credit or turn invoices into cash quick without the waiting time? If you prefer the latter, then what you need is invoice factoring
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.
Action Research Papers Invoice factoring is a type of accounts receivable financing that converts outstanding invoices due within 90 days into immediate cash for your small business. The factoring company will typically pay you in two installments for your invoice: an advance of roughly 80% of your invoice and the remaining 20% (minus factoring fees) after the invoice is paid.
Following this description, once a broker settles an agreement with a shipper, the factoring company will give the broker a copy of the invoice and pay him 80-90 percent of the invoice in cash. The factor then acts as the broker’s accounts receivable department and services the invoice to the shipper. Once the whole transaction is done and the cargo was shipped without any interference, the shipper will then pay the factor 100 percent of the invoice. Finally, the factor takes their fees from the remaining 20 percent that they still owe the broker then gives the latter the remainder. In this model, if a factoring company’s fee is only about ten percent of your total contract with the shipper, then you get 80 percent immediately then another 10 percent after the transaction.
Here are some other perks of having a factoring company:
- Carrier payments
- Agent commissions
- Credit services
- Invoice and collections
click here Another perk to consider is that if you choose to go ahead with your transaction without a factor, then you, as the broker, will accept any liability for any unpaid invoices. A factor, however, carries that liability in a shipper-factor-broker transaction. However, you don’t have to factor everything, especially clients with great credit rating. Those with great credit ratings (they usually get approved by your factoring company) are going to pay even before they receive their invoice. So what should you do with clients like this? Float the invoice.