Obtaining a high credit rating—and being able to improve your days-to-pay score, or even offering “quick pay” services—is a critical part of the broker business. Yet if you’re just starting out as a broker or have a problem credit rating, that can be a difficult proposition, especially since many credit rating services require one or two years of successful operation to reach that category.

That’s why companies such as Advance Business Capital offer a way that brokers can factor loads to their carriers before the two-year mark, says financial expert Steve Hausman, president of Advance Business Capital.

All too often, however, brokers can be caught in a downward financial spiral as:

• Shippers’ payments to brokers are delayed
• Carrier payments are therefore slowed
• The broker’s credit rating drops
• Revenues fall as the broker loses carrier capacity

What do carriers want? When a carrier is considering a freight broker, the broker’s credit rating is only one factor in his decision. Most carriers focus specifically on a broker’s reported “average days to pay” and “bond inquiries.” If a broker has poor scores in these areas, high-quality carriers may look elsewhere.

One important carrier attraction: The broker’s ability to offer “quick pay” options. With quick pay, a broker can broaden his access to high-quality carriers, increasing his capacity and most likely his profit margins.

“Freight brokers who finance their business by living off the carrier float generally find that their float is sinking,” says Hausman. Slow carrier payment can have several negative impacts on the broker; he adds that a broker can lose 5 to 10 percent of the profit margin of the load on slow payments. And if a frustrated, unpaid carrier contacts a shipper directly, the result can be worse.

Factoring can bridge the gap

Accounts receivable factoring puts new brokers, or those with past credit problems, on the same footing as long-term brokers in good standing. ABC, for example, will examine the shipper’s credit rating and manage the accounts receivable process for the broker. The carrier receives direct payment for moving the load, and then ABC pays the broker his fee—minus a commission.

The process bridges the gap between carrier disbursements and the shipper’s payment. And since a reputable factoring company examines not just the financial status of the broker but also of his shippers, the factor can steer new brokers away from slow or non-paying shippers.

And since the financial company assumes full responsibility for paying carriers, he helps increase a broker’s credibility (and reputation) with carriers. Factoring arrangements aren’t loans and in some ways are more stable than traditional lending agreements.

Factoring services are inherently more stable than lending arrangements because they examine credit-worthiness of the entire supply chain. This eliminates many traditional lending criteria that small- to medium-sized transportation companies can having trouble meeting. In addition, the typical factoring arrangement offers:

• No lengthy applications
• No compensating balances requirements
• Little or no ongoing financial reporting
• Unlimited credit lines
• High advance rates
• Short approval process

Factoring can also save on administrative costs for smaller brokers, letting them concentrate on sourcing more freight and establishing high-quality shipper relationships. Having this service can eliminate the need for a broker to establish credit, collection, and payables departments.

Cash flow may be the single most important criteria for a freight broker’s profitability and success. Take a closer look at factoring; it may provide the boost you need to take your business to the next level.

Advance Business Capital, TransCore’s newest partner, provides financial services for the for-hire transportation industry. For more information, please contact your ABC-TransCore support team at (866) 638-8700 or www.loadfunding.com.