Payment and Cash Flow Solutions Every SmartBroker Needs to Know in 2024

Mitigate risk to your business with no payment delays, improve overall financial stability and business health.

Transportation and logistics companies are expected to see a return to market seasonality, which includes peaks around produce and holiday seasons.

With spikes in business that we haven’t seen since early 2022, freight brokerages will face cash flow challenges.

Though the freight economy is beginning to stabilize, one of the biggest challenges that freight brokers face during a freight recession is the need to pay carriers quickly while waiting for payment from shippers. This creates a cash flow dilemma that can have a significant impact on freight brokerages.If freight brokers are unable to pay carriers on time, they risk damaging relationships and losing valuable business.

Another challenge that freight brokers face during a freight recession is the risk of not being paid by shippers on time.Shippers may struggle to make payments or extend payment terms, which can create a ripple effect on cash flow.

The key to survival is maintaining the cash reserves needed to manage carrier settlements and meet payroll, whether revenues are low or high.

Let’s review various financial solutions that can be used to mitigate the impact of extremely volatile market conditions on non-asset freight brokers, in particular. Many of these methods are available to asset-based brokers and carriers, as well, but non-asset brokers have unique needs that merit special consideration.

Finding Success During a Crisis

Through the recent freight market downturn, most transportation and logistics companies moved fewer truckloads at lower rates, leading to drastic reductions in their overall revenues.

One of the most important reasons to remain solvent during a freight recession is to pay payroll. Texas Trucking Association President and CEO John Esparza said to FreightWaves, “the companies that often survive freight recessions are the ones that continue to employ individuals, even at great risk and debt to themselves.” Employees are the backbone of any business, and it’s essential to have the resources to pay them in anticipation of an upswing. By maintaining a strong cash reserve, you can ensure that your business is in a position to take advantage of new opportunities when the market improves.

Another reason to remain solvent is to maintain your relationships with carriers and shippers. In times of uncertainty, carriers and shippers are looking for stability, and a strong cash reserve can provide the reassurance that your business is equipped to weather the storm.

Market downturns can be challenging, but it’s important to remember that they are cyclical and will eventually turn around. During a freight recession, remaining solvent is critical to ensure that you are prepared to capitalize on the next upswing.

The companies that often survive freight recessions are the ones that continue to employ individuals, even at great risk and debt to themselves.

2023 Freight Indices

Year-Over-Year Outlook

Cash is Critical During Rebounds

Happily, transportation and logistics companies can expect an increase in demand accompanied by higher rates when the economy rebounds. As volume ramps up, freight brokers actually face an increase in financial risk.

While their shipper customers tender more and more freight, many of those shippers may continue to extend payments well beyond 30 days. The freight broker is suddenly faced with a huge sum of payables, preventing or postponing new business acquisition as well as timely carrier settlements.

Paying carriers on time is essential for the broker, who must maintain a high credit score and low days-to-pay rating in order to ensure access to the best carriers and trucks. This is even more important during seasonal periods, when competition among brokers becomes intense, and carriers are increasingly selective about loads, rates, lanes, and brokers.

At that point, many brokers will be forced to choose between two unpleasant outcomes: damaging their credit rating by paying carriers late, or exhausting their cash reserves by paying carriers on time despite the lag in shipper payments. Either of these options can curtail business growth, as the broker will be unable to accept new orders.

Freight Brokers Face Unique Financing Challenges

Large 3PLs typically have cash reserves or lines of credit to carry them through this extreme market volatility.Freight brokers do not enjoy such resources, yet they are forced into the role of a banker who essentially provides short-term micro-loans to shippers, by paying the carrier before receiving payment from the shipper.

The hurdles faced by freight brokers are substantial enough that a large cargo claim, non-payment, or even a late payment, can be enough to trigger a layoff or even bankruptcy. Further, in non-asset companies, the owner may have borrowed against personal property, which makes the stakes very high.

Access to the right financial solutions under fluctuating market conditions can help freight brokers to overcome these and other obstacles:

• Cash Flow Reconciliation: Without sufficient creditor cash reserves, a customer’s slow payment or nonpayment can disrupt business-critical cash flows and may prevent the broker from paying carriers on time or accepting new loads.
• Competition: If the broker has consistent access to funds, outstanding receivables will not prevent the broker from soliciting and servicing new accounts. The financial support enables freight brokers to compete more effectively with large 3PLs and digital brokerages for a share of the rapidly dynamic market.
• Credit score: During an economic crisis or downturn, it is more important than ever to pay carriers on time.Brokers who maintain satisfactory credit scores and days-to-pay ratings will find that carriers are more willing to work with them when capacity tightens again.

Freight Brokers Challenges Solved

with access to the right financial solutions.

How to Choose aFreight Broker Financing Solution

The best financial institutions and services provide not only funding but also support for the broker’s business goals and processes. Brokers should look for these attributes when selecting a financial services provider:

FLEXIBILITY

Easy application | No contract terms | No Hidden fees

The right financial solution enables brokers to choose when and how much support is required. Brokers should look for flexible contract terms, hidden fees, and availability of multiple options to fund. Flexibility enables brokerage companies to retain control over their finances and customer relationships.

RELIABILITY

Positive Reviews | Customer Referrals | Customer Service Representative

The financial services provider must have sufficient resources to support the broker’s needs. The broker can build on this foundation to promote the company’s reputation as a reliable resource for both the shipper customers and the carrier vendors

AVAILABILITY

24/7 Dashboard Access | Next-Day Funding | Phone and Email Support

Modern conveniences, such as dashboards and automation, are critical to today’s fast-paced business environment. Brokers should look for a financial services provider that offers uninterrupted access to funds at any time of day or night, throughout the year.

Financing Options for Freight Brokers

As freight brokers cope with this new, challenging economic period, they need a consistent, reliable source of funding. While good cash flow management is important under any market conditions, a period of retrenchment can deprive the business of its cash reserves. Declining revenues and slow-paying customers combine to erode any cash pad, leaving the business ill prepared for the rebound to come.

If the economy recovers, as is predicted for the coming spring of 2023, freight brokers’ depleted cash resources will be challenged beyond the demands of a seasonal peak. The change in demand will be a double-edged sword for brokers, as shipper customers ratchet up tender volumes and carriers become more selective about loads, routes, and rates.

In order to take advantage of the seasonal upswing, and remain competitive as a desirable partner for both shippers and carriers, many brokers will benefit from financial support. There are five types of financial solutions available, including the do-it yourself plan, also known as self-financing:

Self- Financing

Self-financing is when freight brokers use their own capital to fund jobs.

BENEFITS:

One of the main advantages of self-financing is the control it offers. By self-financing, brokers have full control over their finances and decision- making. This allows them to allocate resources as they see fit and make investments that align with their growth goals. Furthermore, self-financing allows brokers to avoid incurring debt and potentially missing payments that would impact a broker’s credit score.

DRAWBACKS

However, self-financing also has its drawbacks. One of the primary disadvantages is the lack of support for payables. When self-financing, brokers are responsible for covering all of their expenses, which can be challenging during times of slow business or economic uncertainty. Additionally, self-financing may limit a broker’s access to capital, making it difficult to make large investments or take advantage of opportunities.

Nearly 40% of freight brokers

reported wanting to improve cash flow in 2023.

*According to Denim’s2022 Freight Broker Index

CONSIDERATIONS FOR FREIGHT BROKERS

Self-financing is not a viable option for freight brokers without sufficient capital reserves. Many freight brokers do not have the cash reserves needed to pay all carrier invoices on time, especially when shippers pay late.

When the market environment veers suddenly from boom to bust and back again in a short time, those cash reserves can be depleted just as demand soars. A subsequent spike in business volume, however welcome, can increase the pressure on cash flow, and may cause the broker to pay carriers too slowly. That strains relationships with key vendors at a time when their cooperation is needed most urgently. Carriers may file on the broker’s surety bond as a last resort. That action will cover the broker’s payables temporarily, but it will not heal the relationship with the carrier. It will also do long-lasting harm to the broker’s reputation and credit score.

Line of Credit

Freight brokers is a revolving credit arrangement that allows the broker to borrow up to a predetermined amount, payback the borrowed amount and then reuse the credit as needed.

BENEFITS:

One of the main benefits of a line of credit is its flexibility. A line of credit acts as an emergency fund, allowing freight brokers to access capital as needed. This can be particularly useful during slow periods or unexpected expenses. Additionally, a line of credit can provide peace of mind, knowing that there is a source of funding available when it’s needed.

DRAWBACKS

One of the primary disadvantages is that it may not cover all of a broker’s receivables.While a line of credit can provide access to capital, it’s not a comprehensive solution to cover all of a broker’s expenses. Additionally, a line of credit does not provide support for payables, which can be challenging during times of slow business or economic uncertainty.

CONSIDERATIONS FOR FREIGHT BROKERS

Non-asset freight brokers may lack the collateral or financial resources to qualify for a line of credit. Further, if they are able to secure a line, it does not necessarily provide enough working capital to support rapid growth during a market seasonality. Typically, the line will cover a portion of the broker’s average receivables, so a sudden surge of business could easily exhaust the available credit. When the line runs out, the broker is no better off than before, and may be forced to turn away additional business.

Receivable Insurance

Receivables insurance is a policy or plan for freight brokers that secures a freight broker’s receivables up to a specified limit.

BENEFITS:

Receivables insurance protects brokers against serious losses. Freight brokers are often at risk for shipping losses, and insurance receivables can provide peace of mind knowing that their business is protected in the event of an unfortunate incident. This protection can be particularly important for freight brokers with a significant amount of loads on the road.

DRAWBACKS

Receivables insurance is very costly and also has limitations. One of the main drawbacks is that it may not cover all of a broker’s receivables. While insurance can provide protection against losses, it may not fully cover the costs of an incident or non-payment. This means that freight brokers should have contingency plans in place in case their insurance does not provide sufficient coverage.

CONSIDERATIONS FOR FREIGHT BROKERS

Receivables insurance is intended to prevent catastrophic loss, in the case where a shipper customer goes out of business while owing the broker a huge sum. Receivables insurance has several drawbacks, however. The insurance policy does not provide any cash advances or other support to smooth uneven cash flow, as it covers uncollectible debts only after 90 or more days.

Non-Recourse Factoring

Non-recourse factoring is a financing option for freight brokers that provides immediate payment for invoices, streamlining accounts receivables, and eliminates the risk of non-payment by transferring the risk to the factoring company

BENEFITS:

This type of financing provides freight brokers with immediate payment for their invoices, allowing them to improve their cash flow and support business growth.The risk of non-payment is transferred to the factor, meaning if the customer does not pay the factoring company assumes the cost. The process of invoicing and payment is also streamlined, reducing administrative burdens and freeing up time for the broker to focus on other aspects of their business.

DRAWBACKS

Since the factoring company is assuming the risk of non-payment, non-recourse factoring is very expensive and selective. The higher factoring fee reduces a broker’s margins and overall profitability. Additionally, non-recourse factors scrutinize every customer and jobs often denying funding due to risk.

CONSIDERATIONS FOR FREIGHT BROKERS

This type of financing is limiting for scaling freight brokers looking to expand business. A non recourse factor screens the broker’s customers very thoroughly, and will factor loads only from customers who have impeccable credit. As brokers are not likely to work exclusively with credit- perfect customers, there is a good chance that the freight brokerage will have customers denied by the non-recourse factoring company.

Recourse Factoring

Similar to non-recourse, recourse factoring is a financing option that provides freight brokers with immediate payment for their invoices, improving cashflow and supporting business growth. However, the freight broker is responsible for any unpaid invoices.

BENEFITS:

Recourse factoring is less expensive than non-recourse factoring. Freight brokers only pay a percentage of a freight invoice total when they factor an invoice. This means that freight brokers can access the financing they need at a more affordable rate, which can help them scale their business. Additionally, recourse factoring streamlines invoicing and payments. This can help freight brokers reduce administrative workload and ensure that carriers are paid promptly, which can help them maintain strong relationships with their carriers.

DRAWBACKS

The downside to recourse factoring is that not all vendors accept recourse financing.This means that freight brokers need to carefully consider which partners they work with and ensure that they are willing to accept recourse factoring.Additionally, brokers are liable for non-paid invoices, which means that they need to keep an eye on collections and intervene when needed.

CONSIDERATIONS FOR FREIGHT BROKERS

For freight brokers, recourse factoring is often the most convenient and flexible way to maintain sufficient working capital, especially in times of economic upheaval.A full-service factor will enable the freight broker to keep up with carrier settlements and other expenses when business is scarce, and to manage the surge in payables when the economy rebounds. In addition, the best factoring companies will also handle back-office tasks, including payables and receivables management, collections, advances, and quick pay, freeing the brokerage owner and staff to focus on business development, carrier relations, and logistics operations.

Still have questions - Check out this deep dive on recourse vs Non-Recourse Factoring.

How to Choose a Factoring Partner

Freight brokers require a unique approach to factoring. The timeliness and consistency of cash flow is critical to the broker’s success, as brokers will be wary of taking on new business unless they have confidence in their ability to pay carriers promptly while continuing to cover labor and non-labor expenses for the business.

Here is what a freight broker should look for in a factoring partner:

There is one factoring company that offers all those benefits and more. Denim provides freight factoring and financial programs designed specifically for freight brokers.

Choose Denim as Your Back-Office Partner

• Apply online and set up your account. It’s easy, and it’s free.
• No personal credit check is required, just an MC number and broker authority
• Transparent pricing at a consistent rate per load, with no hidden fees
• Flexible financing — you choose which invoices to factor
• Free quick pay so you can pay carriers fast, either for free or for a convenience charge
• Back-office automation is simple. Denim handles payables, receivables, and collections
• Dedicated account manager is available for consultation and support.
• Cancel any time. No long-term contracts, no termination fees. You’re in charge.

To Factor or Not To Factor

Denim empowers brokers to decide for themselves whether or not to factor each load. Either way, you can take advantage of Denim’s Freight Payment System. SmartBrokers know not to waste time doing tedious data entry in multiple systems or updating carriers and payment status over the phone. That’s time better spent on parts of the business that will drive success, or better yet, extra time with friends & family (Check out how one broker has switched to a 4 day work week with the time saved from technology automations.). SmartBrokers also know when and how to manage risk with tier cash & assets, especially when it comes to financing their tendered freight.

Here is an example of the timing and cost of factoring an invoice with Denim’s Freight Payment System, alongs idean example of the same invoice processed as a non-factored payment.

This example is based on factoring an invoice of $1,500, where the broker receives a 17% gross margin. The first payment takes place within 24 hours of the carrier’s delivery and invoice using Denim’s QuickPay feature. Denim does not change any additional fees to make a factored payment, just the 3% factoring rate of $45 which is taken.

Without factoring, the broker receives the full margin amount, but may need to “float” the carrier payment as many invoices include net-30 or even net-45 payments. Denim’s Freight Payment System (FPS) handles the transaction for only $4 for the non-factored job, which the broker is responsible for at the time payment is made to the carrier.

CONCLUSION:

Grow Your Freight Brokerage with Denim

Set up your Denim account today. Even if you aren’t ready to factor any invoices now, you’ll be ready to growwhen the economy rebounds. Meanwhile, you can take advantage of Denim’s back office support. When you want to factor an invoice, submit it to Denim for a customer credit check. The vast majority of customers and invoices are approved right away.

Free setup. No long-term contracts.Cancel any time.

All you need is active freight brokerage authority, a validMC or DOT number, and a business bank account. The account is free, there is no long-term contract or cancellation fee, and no personal credit check. Call (855) 250-4142or fill out this account form to get started now.