As intermediaries between carriers and shippers, freight brokers face distinctive business challenges, from managing cash flow to learning about the credibility of companies they work with. A freight broker line of credit can assist brokerages in managing financial stresses, overcoming challenges, and understanding the trustworthiness of potential clients.
Primary Challenges for Freight Brokers
Why is a line of credit necessary for freight brokers? Business credit for trucking is essential to address challenges common to most freight brokerages, including surety bonds, insurance, competition, liability, and cash flow.
1. Surety Bonds
By definition, “a surety bond is a promise to be liable for the debt, default, or failure of another. It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee.)”
Every freight broker is required to obtain a surety bond from the government to operate legitimately in the United States. This agreement between the broker and the government is a guarantee that the freight broker will meet all contracts with shippers and carriers.
Freight brokers are required to obtain a $75,000 surety bond. If a freight broker does not live up to its contracts with a shipper or a carrier, the surety bond assures shippers and carriers that the broker has the cash or assets to cover at least the amount of the bond.
2. Insurance
Freight brokers can procure surety bonds from insurance companies. However, brokers are required to pay premiums. To lower premiums, freight brokers can demonstrate that their company is low-risk and reliable with good credit scores.
3. Competition
The freight broker industry is extremely competitive. Once again, low-risk engagements and reliability help freight brokers stand out amongst the competition.
4. Liability
Although not always the case, freight brokers are sometimes liable for shipment or equipment damages during travel. To limit liability, freight brokers should evaluate the dependability and credibility of potential carriers before accepting new engagements.
5. Cash Flow
Financial strain is one of the most significant challenges faced by freight brokers, specifically consistent cash flow. While starting a freight broker business is relatively inexpensive, financial challenges arise quickly. Because carriers are often paid before shippers are billed, cash flow can become clogged or entirely depleted. As the intermediary between shippers and carriers, transportation brokers are often forced to satisfy and balance both parties involved before acknowledging personal cash flow issues.
However, unacknowledged cash flow issues eventually cripple a company. Amid balancing such significant challenges, freight brokers may look for additional financial assistance to promote business growth and livelihood. Freight factoring is one such option.
Benefits of a Freight Broker Credit
1. Surety Bonds & Insurance
As mentioned, strong business credit scores can help freight brokers appear low-risk, credible, and reliable to insurance companies, often resulting in leverage to negotiate lower premiums.
2. Competition
Again, freight brokering is a competitive space, and strong business credit will make your company stand out among the rest. Additionally, business credit may allow your freight brokerage to negotiate for higher prices. Shippers and carriers appreciate low-risk, reliable brokers.
3. Liability
One business credit service explores the emphasis placed on credibility in the freight brokerage industry for both shippers and carriers.
• Shippers “will pull credit because they’re trusting the broker with their load. The brokers credit will offer detailed information about payment patterns and financial responsibility (or lack thereof).”
• On the other hand, carriers “will pull the brokers credit because they want to make sure there is a consistent history of payments on time. Carriers need to be able to depend on timely payments from the broker to fund their operations and turn a profit.”
Likewise, as a broker, you should also check business credit files of potential shippers and carriers. As mentioned, business credit files help you choose the best companies to engage with, reducing liability risk.
4. Cash Flow
A freight factoring line of credit for brokers directly addresses cash flow issues. In the freight factoring process, the factor purchases invoices directly from the broker, providing the brokerage with immediate cash needed to pay carriers. The factor then waits to receive payment for the invoice, instead of the freight brokerage. Factoring provides companies with cash needed to continue business on slow-paying invoices.
Factoring Line of Credit vs Bank Line of Credit
When considering financial assistance, freight brokers may consider acquiring a bank line of credit in comparison to a factoring-based line of credit. While a bank line of credit may be viable for several issues, consider a few potential downsides to pursuing this form of financial assistance as a freight broker:
1. A bank line of credit can add to the debt already carried by the broker. As with any business, avoiding debt when possible is best.
2. Additionally, a bank line of credit has its limits. Eventually, a maximum borrowing limit will be met, stopping cash flow. Once the broker can no longer rely on the bank line of credit, he/she is forced to rely on shippers once more, often an unreliable source of cash flow.
Advanced Commercial Capital
At Advanced Commercial Capital, we protect our clients from unpaid freight invoices due to fraud, bankruptcy, or delinquency – without any surprises. To learn more about the ins-and-outs of a freight factoring line of credit, reach out to our team at 855.465.4655 or via our online contact form!