Freight Brokerage Business. The Staff of Entrepreneur Media, Inc.
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as soon as they become past due. Initial reminders don’t have to be ugly or obnoxious, but you want to make it clear that you expect your customers to pay by the terms to which they agreed when they applied for credit.
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Mail thieves operate even in the nicest of neighborhoods, both residential and commercial. If you do not have a secure, locked mailbox and you receive checks by mail, rent a post office box so you know they’ll be safe.
The Power of Compensating Balances
One of the ways to measure the value of a company is its profitability. When it comes to the value of a company to a banker, the measure is in compensating balances. Though your ultimate net profit may be pennies on each revenue dollar, you are still funneling large sums of cash through your bank account as you collect from shippers and pay carriers.
Banks are very interested in companies with large amounts of cash flow. Even though the money doesn’t really belong to you, you have temporary control over it. It will spend a certain amount of time in your account, and that time can be very important to a bank.
As you build your relationship with your banker, be sure to point out how much cash you expect to move through your accounts—it’s called compensating balances—and ask what types of services and/or concessions the bank can provide you because of it.
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As a broker, you’ll collect and disperse a tremendous amount of cash. Resist the temptation to spend money that is already obligated to payables. “If they’re not good money managers, that’s where a lot of the startup brokerage operations get into trouble,” says Indianapolis freight broker Chuck Andrews. “They see all this money and start spending it. Then it comes time to pay the bills, and there are no funds.”
Due to the nature of the industry, paying carriers on time is critical. In fact, Bill Tucker says you are a financier of sorts for the carriers you use, because you’ll likely be paying them before you get paid by your shippers.
While carriers make up the major portion of your payables, you have other bills to pay. Certainly on-time payment of all your bills is essential to building a good credit rating and maintaining a good reputation.
But by the same token, it is not good cash management to pay your bills before they are due. If your suppliers are willing to extend terms of net 30, then it’s okay for you to take 30 days to pay that bill—it’s not necessary to pay it 10 or 15 days early. Keep your money working for you in your accounts for as long as possible.
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According to freight broker Chuck Andrews, you need to watch your commission levels because if you are in a highly competitive area and working on margins that are less than the industry average, you may end up operating at a loss if you try to factor.
Factoring is the sale of accounts receivable to a third-party funding source for immediate cash. In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service to the customer, and generates an invoice. The factor (the funding source) purchases the right to collect on that invoice by agreeing to pay the client the face value of the invoice less a discount, typically 2 to 6 percent. The factor pays 75 to 80 percent of the face value immediately and forwards the remainder, less the discount, when the customer pays.
Because factors are not extending credit to their clients, but instead to their clients’ customers, they are more concerned about the customers’ ability to pay rather than the financial status of their clients. That means a company with creditworthy customers may be able to factor even though it couldn’t qualify for a traditional loan.
Though the principles are the same, factors vary based on the type of businesses they handle, the amounts of invoices they purchase, and the specific services they provide. Choosing a factor is like choosing a bank—you have to find the right match.
Though factoring is almost as old as commerce itself, it was used primarily by very large corporations until the mid-1980s. Since then, awareness of factoring has grown, and more companies are incorporating this weapon into their cash management arsenal. Even so, there are still plenty of misconceptions about factoring.
Though factoring is often confused with accounts receivable financing, it’s important to understand that this is not a loan, and it does not create a liability on your balance sheet. Rather, it is the sale of an asset, which in this case is an invoice for goods or services received by the customer.
Factoring is also considered one of the most expensive forms of financing, and while it may appear so at first glance, that’s not necessarily true. The factor’s fee is generally higher than the interest rate a traditional lender charges, but you need to also consider that factors provide a wide range of services that banks do not. They can help with credit checks, take over a significant portion of the accounting function for you, and generate reports to help you track your financial status.
Once you get a handle on money matters, you should be well on your way to running a successful freight brokerage.
By now, you should know how to get started and have a good idea of what to do—and not do—in your own freight brokerage. But nothing teaches as well as the voice of experience. This chapter features quotes from established freight brokers discussing what has contributed to their success and what they think causes companies to fail.
Use Advertising and Marketing Techniques that Work
Track your marketing efforts so you can concentrate on the techniques that work and eliminate the ones that don’t.
Smyrna, Tennessee freight broker Cathy Davis said small giveaway items, such as pens, notepads, caps, and T-shirts, work well. Company newsletters (or a blog) with personal and industry information also get a good response. She said donations to fundraising events may be helpful (depending on the event and the degree to which it’s promoted), but the impact of website sponsorships is questionable. She recommended developing a three-panel printed brochure that is easy to include with letters, invoices, and checks.
Chuck Andrews, an Indianapolis freight broker, builds name recognition by placing periodic ads in association newsletters, as well as in annual association and industry directories.
It’s understandable that at this point your primary focus is getting started, but you also need to think about the future.