New twists in freight invoice factoring

Brokers and carriers seeking faster payments are finding new options entering the market, including electronic factoring. (Photo: Andrew Pons)

Brokers and carriers seeking faster payments are finding new options entering the market, including electronic factoring. (Photo: Andrew Pons)

Options are growing to help carriers and brokers get paid quicker

Invoice factoring has been around for decades – according to Steven Hausman, president & CEO of Triumph Business Capital – perhaps even thousands of years. No matter how long it’s been around, factoring has become an increasingly popular option for third-party logistics (3PLs) companies and freight carriers to manage cash flow.

In any shipper-broker-carrier arrangement, cash flow is an issue. Carriers want to be paid quickly to fund key items such as fuel and driver pay. Brokers want to pay carriers to build up a trusted relationship which ensures capacity when needed. Shippers, though, will try to push broker payments out 30, 60, 90 days or more.

That dynamic caused many carriers – especially smaller fleets and owner-operators – to begin factoring their bills. A factor buys the freight bill from the carrier for cash – at a discount. The carrier doesn’t receive full payment, but it does receive money sooner. The factor then collects the debt from the broker or shipper. Brokers use factors in a similar way, to pay carriers quicker to ensure needed capacity down the road.

Timothy Brady, a small business trucking expert, writes that fleets can utilize several tactics to get paid, including offering discounts for shippers who pay early or building an interest charge into rates.

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Hausman says that there is some anecdotal evidence that as many as 80% of carrier payments are handled by factoring companies.

“As a result of increasing competition, carriers are solicited daily with factoring offers of high advance rates (the percentage of the freight bill advanced at time the invoice is sold or factored) coupled with factoring fees that are a fraction of what they were 10 years ago,” Hausman says. “In fact, factoring fees are typically at or below the same pricing which many brokers charge for ‘quick pay.’”

Technology, though, is starting to change the factoring business. Hausman says there are three emerging categories of payment processing solutions: dynamic discounting, supply chain finance, and virtual card payments.

Dynamic discounting involves a buyer (freight broker) and vendor (carrier). Payment features a discounted or reduced rate in exchange for quicker payment. In some cases, credit may be extended, Hausman says, usually in the form of a loan structure to the buyer.

“We haven’t seen huge impact of dynamic discounting in the trucking space, largely because of the complexity,” Hausman notes. “Most truckers are happy with two payment terms: standard and quick.”

Brokers end up being kind of like banks. Yes, they may pay carriers in 30 days, but carriers want to be paid faster so they factor the load.
— Todd Ehrlich, CEO of BAM Worldwide

Virtual card payments is a direct B2B style payment option whereby payments are made through a single use credit card number. While not very popular, they are nonetheless an option that Hausman advises be included in a payment solutions toolbox.

The third area that is quickly emerging is supply chain finance, sometimes referred to as reverse factoring. Triumph’s TriumphPay is a form of reverse factoring. Under this scenario, freight brokers “can become more attractive to their vendors (carriers) by incorporating working capital options from the onset,” Hausman explains. “Unlike traditional factoring, where carriers sell their accounts receivable, reverse factoring is a financing solution initiated by the broker to help its carriers finance their open accounts more easily and at a lower cost than what would normally or otherwise be available.”

BAM Worldwide provides another solution that it calls electronic factoring. This solution gives brokers the ability to pay carriers quickly without assuming as much financial risk.

“Brokers end up being kind of like banks,” Todd Ehrlich, CEO of BAM Worldwide, tells FreightWaves. “Yes, they may pay carriers in 30 days, but carriers want to be paid faster so they factor the load.”

Ehrlich says the BAM platform automates the process so brokers don’t have to keep cash on hand to pay carriers. The average broker using the BAM platform has its business grow over 60% year over year, Ehrlich says. Electronic ABL (asset-based lending) and factoring eliminates the need for brokers to seek high-interest loans from traditional banks and doesn’t come with the risk those loads bring.

“Many of the bankruptcies in recent years have been because banks give typical loans and our system doesn’t allow that,” Ehrlich notes, adding that electronic factoring is really “freight supply chain financing.”

Brokers who participate in BAM’s BAMWire are able to use what is essentially a line of credit to pay carriers and other related shipping bills. “If they wait for shippers to pay them before paying the carrier, the broker’s credit rating would [drop],” Ehrlich says.

Electronic factoring is sometimes referred to as “quick pay” and offers several advantages to brokers and carriers. First, carriers who receive quicker payments often lower their rate demands. Carriers are also quicker to accept the broker’s loads knowing that payment will be sooner – this saves time finding carriers and builds up strong relationships.

Paying carriers quicker will also improve the broker’s “days to pay” credit rating, which translates to more available capacity.

BAMWire also handles the entire process electronically, including payments to carriers as determined by the broker, shipper invoices and final disbursement to close out the transaction.

FreightCo is a Fort Wayne, IN-based third-party logistics company that utilizes BAMWire, starting in 2014 after it was rejected by a bank for a credit line to improve payment times.

According to Brad McDonald, founder of FreightCo, using BAMWire has led to an 80% increase in load count, gross margin improvement from 8 to 14% and net income growth of 20%, all while saving $90,000 in administrative costs due to direct labor savings.

“In just 5 months, BAM allowed us to grow our business by more than 30%,” McDonald said. “This growth is due to the cash infusion by BAM, allowing us to provide better payment terms to carriers and increase carrier capacity which has opened up opportunities with new and existing customers. The ability to offer quicker payments has also increased our credit score dramatically.”

For brokers and carriers, the new options in factoring are providing more flexibility and improving the trust in the relationship – making it a win for both parties.