As a freight broker, factoring is a great solution if you want to use your business’ working capital to attract more clients and build strong relationships with carriers. But not all freight broker factoring options are the same.
Here, let’s discuss what freight broker factoring is, as well as the two most common types of factoring for freight brokers: recourse factoring and non-recourse factoring.
What is Freight Broker Factoring?
Factoring for freight brokers means trading a small fee (under 5%) for a cash advance on all invoices. This can be helpful for brokers who don’t have the liquidity to float their cash flow between paying their carriers and getting paid by their customers.
For most freight brokers who use factoring, their operations run more smoothly they save time across departments, and they can pay carriers quickly and reliably so they become their trusted partner.
Now that we discussed factoring for freight brokers, let’s look at the two different options: non-recourse and recourse factoring.
Recourse Factoring for Freight Brokers
When you take on the liability for invoices that aren't paid, you're tapping into recourse factoring. In exchange, the fees for these services are lower and your customers are more likely to get approved for a credit line.
The Benefits of Full Recourse Factoring for Brokers
Wondering if recourse factoring is right for you? Here are some of the main benefits:
One of the main benefits of full recourse factoring for freight brokers is that you can usually get a lower factoring fee because the factoring company is taking on less risk themselves.
Flexible Time to Pay
Even though most recourse factoring companies will charge-back an invoice within 90 days if they can’t get payment from the customer, there is always room for flexibility. For example, we will approach customers that have longer than normal pay terms if they have excellent credit. We are willing to be flexible for our freight broker customers.
In addition to this flexibility, we are also diligent in figuring out the reason for a non-payment before it becomes a recourse issue. More often than not, the reasons are related to paperwork (a page of the BOL is missing, the AP contact quick and we need to get an updated phone number, etc.). These issues are generally resolved well before we approach the recourse timeframe of non-payment.
Only Attract Reputable Clients
When you back up your clients, you'll naturally get more picky and only partner with ones who present a low credit risk. Our credit department and underwriting team do a deep dive on any customers credit and notify you if there are any alerts or reasons to be concerned. We will not approve any customer we feel we are unable to collect funds from based on their payment history.
Unlimited Credit Checks
Keep your own credit secure by not dealing with those who have credit below your set standards. Denim offers free, unlimited credit checks on all your shippers. Not only will you know if a customer is credit worthy before accepting any loads, Denim will also continously monitor your customers credit and inform you of any indicators that a customers credit is declining.
Other lenders may ask for stipulations or wait periods that make getting paid more trouble than it's worth. Denim just pays, turns your invoices, and submits final payment. It's what we call a win-win.
The Downside to Full Recourse Factoring for Brokers
The main downside to full recourse factoring for freight brokers is that they are taking on the liability if their customers don’t pay. This is why it’s important to establish long-lasting relationships with customers that have good credit and solid payment histories. This enables you to pay lower fees for recourse factoring without worrying about the risk.
Non-Recourse Factoring for Freight Brokers
Non-recourse factoring for freight brokers means that factoring companies assume responsibility if invoices are lost. If you're a broker, this is great if you can get approved, but approval will be more strict and there are often loopholes hidden in the fineprint.
The Benefit of Non-Recourse Factoring for Brokers
The main benefit of non-resource factoring is that it takes the risk off the broker. Of course, you should check your contract to make sure zero risk truly means zero risk. Even though companies claim to be non-recourse, there is usually a loophole in the agreement that states that the only time you will not be charged back on a load is if the customer files for bankruptcy or goes out of business within the 90-day collection period. If the client has perfect credit, it’s extremely unlikely this will happen.
The Downsides of Non-Recourse Factoring for Freight Brokers
Non-recourse factoring might sound tempting because you have less liability as a freight broker, but there are some important considerations as you grow your brokerage and need to be more flexible.
Limited Customer Base
Because a non-recourse factoring company will be taking on more risk, a non-recourse factor screens the broker’s customers very thoroughly and will factor loads only from customers who have impeccable credit. As small brokers are not likely to work exclusively with blue-chip customers, there is a good chance that the freight brokerage will have all or most of its customers denied by the non-recourse factoring company.
As you research factoring companies, you may find that non-recourse factoring companies often charge a higher rate because they are taking on more risk. In addition to that, generally only established brokerages will be approved for non-recourse factoring so it might not even be an option for startup freight brokers.
As a freight broker in a competitive industry, every dollar counts. Because of this, it’s not advantageous to both limit your customer list and also pay more in factoring fees.
Your Freight Broker Factoring Solution
Every freight broker is different and will require different needs with choosing a factoring solution. Whether you are a startup broker or established brokerage, factoring can be a good option to maximize your working capital, manage your cash flow, and build strong relationships with shippers and carriers.
At Denim, we offer recourse factoring because it’s the best way to serve our clients, no matter the size of their brokerage. We also offer a number of tools to protect your brokerage, from unlimited customer credit checks to important business metrics like most and least profitable customers.
Want to learn more about factoring with Denim? Sign up for an account today or schedule a demo to experience the whole platform!