To start with a definition, “freight payment” refers to paying for transportation services. It sounds straightforward enough, given that a shipper must pay a carrier to haul its freight. However, the freight payment process can be more complicated for freight brokers, and that’s because freight brokers act as connectors between shippers and carriers.
What is the Freight Payment Process Like for Freight Brokers?
On the one hand, a freight broker must pay the carriers they work with to transport shippers’ goods. But on the other hand, a freight broker also must collect payment from those shippers. Shippers and carriers tend to approach freight billing on slightly different timelines. For example, many shippers operate on net-30 or net-60 terms, meaning they’ll pay a broker’s invoice within 30 or 60 days. Carriers, however, often expect brokers to pay much more quickly on a net-15, net-7, or immediate basis. For freight brokers, the freight payment process isn’t just about paying bills and collecting money owed. It’s also about smartly managing cash flow, so those periods between carrier payment and getting paid by shippers don’t disrupt business operations.
Understanding Freight Invoices
Because of their placement in the supply chain, freight brokers must process invoices in two directions. They receive and pay invoices from carriers and submit and collect invoices to shippers. Most of a freight invoice’s core details are self-explanatory – it will outline the service rendered, the cost for the service, and the payment due date, among other information. Still, freight invoices also have some more complicated aspects. Knowing these things can protect brokers and shippers from unexpected costs and help them better manage their cash flow. How much a carrier bills for transport depends on the freight rate or the amount a shipper or broker pays for line haul. It’s important to know that freight rates aren’t simple flat fees. Many factors help determine freight rate, including mode of transportation, fuel surcharges, haul distance, freight class, weight, and more. Carriers’ invoices also sometimes contain what’s known as accessorial charges – fees for additional services provided aside from transporting freight from Point A to Point B. Some of the most common accessorial charges brokers may encounter include:
- Detention charges happen when drivers wait extra time before getting loaded or unloaded at the loading dock.
- Reconsignment charges occur when freight destination changes after a carrier has already picked up the shipment.
- Stop-off charges come to pass when additional stops get added to a route.
Knowing the ins and outs of freight rates and accessorial charges can save you and your shippers from surprise bills. It will also help charge shippers for your brokerage services more accurately.
Common Freight Payment Pitfalls
As is evident by now, freight payment has more complexity than it may seem at first glance. Thanks to all the moving parts, the invoices a broker receives and sends can change dramatically from day to day and route to route. Unfortunately, that complexity means mistakes are a fact of life. Watch out for these three pitfalls:
- Inaccuracies in documentation. For example, duplicate payments and inaccurately calculated charges are not uncommon. That’s not because of unscrupulous carriers but because the process provides much room for error. As a broker, you want to ensure accuracy in the invoices you receive to prevent you and your shippers from overspending.
- Compliance with agreed payment terms. The different payment terms of shippers and carriers can also present a challenge. No matter how long it takes shippers to pay, brokers need to stay liquid enough to pay carriers on time. Otherwise, carriers may stop working with you; or worse, they may file against your surety bond, which will cost you additional money and could hurt your credit and reputation in the long run.
- Poor bookkeeping. Freight brokers also need to be sure they’re keeping good records of both payments to carriers and payments from shippers. According to federal regulation — specifically, 49 Code of Federal Regulations part 371.3 — every party in a brokered transaction has a right to review records of those transactions. If carriers or shippers ask, a freight broker must be able to furnish information like the bill of lading, the details of all parties involved in the transaction, the amount of compensation received for brokerage services, and more.
Freight Payment Partners
Many brokers handle the freight payment process in-house, but many have turned to freight payment partners to lend a hand. Working with a financial partner can streamline the process for brokers, shippers, and carriers while avoiding the common pitfalls outlined above. For example, a platform like Denim Payments offers automated invoicing, which can help brokers avoid duplicate and inaccurate invoices. With managed collections, brokers can also spend less time chasing shippers for payment and more time on critical business functions. Another important financial tool that helps brokers maintain consistent cash flow is factoring. Factoring allows a broker to sell unpaid invoices to a financial partner for immediate cash.
After processing a paid invoice, the financial partner keeps a small percentage, and the rest of the money goes back to the broker. Many financial partners also offer carrier QuickPay options, which allow brokers to pay carriers faster. That efficiency, in turn, leads to better relationships with carriers. Reports show that as many as 90% of brokers don’t have easy, digital ways to pay carriers. As such, carriers prefer working with those brokers that pay on time and reliably. Finally, financial partners provide analytics and reporting tools, which turn a broker’s financial transactions into a wealth of valuable data. Not only does that help a broker ensure they’re paying and being paid on time and accurately, but it also facilitates better cash flow management and trend tracking in shipping costs.
Efficient Freight Payment is Good for Business
Freight costs can account for as much as 10% of a shipper’s business expenses. Consequently, shippers want to work with brokers that can keep those costs low, and carriers want to work with brokers that pay dependably. When freight brokers efficiently manage the freight payment process, they can help shippers see better value for their money, ensure their carriers get paid on time, and establish the reliable cash flow needed to keep growing their business. To learn more about automating your freight payments, contact us today. If you’re interested in learning more about how Denim can help grow your credit and help build your business, we’d love to talk.