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Factoring Freight for Brokers: How To Finance a Freight Brokerage

Moving freight is a complex operation involving many moving parts. It requires coordinated efforts from a vast group of individuals who are knowledgeable about the ins and outs of the trucking industry. Freight brokers play an integral role in the process. 

If you are interested in becoming a freight broker, you need to know where to begin and what to expect. Freight brokerage can be a lucrative business venture if handled right. 

Not looking to start a freight brokerage? Understanding how freight financing works can help you get better rates when finding loads and looking for invoice financing.

What Is Freight Brokerage? 

Freight brokers serve as a middleman between shippers and carriers. They ensure that cargo gets to a destination in the most efficient manner possible. 

Brokers don’t own the cargo or the shipping vehicles. Instead, they use their knowledge of the shipping process to ensure that each party benefits from the arrangement.

By helping companies find the best solutions for their shipping needs, you can earn significant commissions as a freight broker.

How Does Financing a Freight Brokerage Work? 

One of the biggest challenges of freight brokerage is cash flow. In many cases, a carrier wants to be paid soon after delivering a load. However, the shipper may be slow in paying their invoice. 

Thus, a broker must make sure that their cash reserves are sufficient to handle the demands of both parties. A freight broker line of credit is one solution for obtaining the operating capital needed.

A bank line of credit is one option for financing a freight brokerage. With this method, the bank establishes a set amount that your company can borrow against as needed. You will pay interest on the loan and may apply for an extension if you max out the limit.

With this process, the broker avoids the cash flow issues that result from slow-paying shippers.

3 Steps for Financing Freight Brokerage

If you are considering a bank line of credit, you must meet specific requirements. For instance, your company should be at least one year old with a solid credit and collection history. 

Step 1: Plan and Budget for Costs

The first thing you should do before choosing a financing option is to create a detailed business plan. If you don’t know the costs of operating your business, you won’t know how much to borrow.

In addition to a few office supplies, you must obtain a broker license, secure a freight broker surety bond, and register with the FMCSA. It’s important to allow for these costs in your budget. You should also determine how much cash on hand you’ll need for paying carriers. 

Step 2: Decide Your Financing Method

Choosing the best financing method for your company’s needs can have a big impact on your reputation as a reliable broker. Carriers and shippers need to know you can be trusted to pay on time. 

The three primary financing methods for a freight brokerage company are:

  1. Bank line-of-credit loans
  2. Commercial bank loans
  3. Factoring loans

Bank line of credit loans allows you to make payments on the amount you’ve used. The interest rates are lower than traditional loans or credit cards. One of the disadvantages of line of credit loans is that your interest rates and payments are higher if you have a low credit score.

Commercial bank loans don’t require collateral to get the loan, so your business assets are safe from being confiscated in the event of bankruptcy. However, the loans are difficult to qualify for and carry high interest rates.

Factoring loans are an easy way to get cash right away. They involve selling your accounts receivable to a third-party funding company, such as industry gaint TAFS. The company pays immediately at a rate below the face value of the outstanding accounts. One downside of factoring is that the discounted payments reduce your profits. 

Step 3: Applications

Each financing company will expect you to provide an application. First, they want to know your credit score, credit history, and length of time in business. They will also ask for your most recent accounts receivable report and tax documents. 

To apply, you must have the following:

  • A business bank account
  • A tax ID number
  • Personal identification
  • Credit-worthy clients
  • A/R aging report
  • A copy of your Articles of Incorporation

Many banks and finance companies allow you to apply online. Some factoring companies will provide an online factoring quote.

What to Expect with Financing Freight Brokerage

If you’re wondering how to start a freight brokerage business, you must begin with the basics. Learn all you can about the qualifications, requirements, fees, and payment options. The following information may prove helpful:

Fees

Financing involves fees, interest, and payments, and these will vary depending on the company you choose. 

The fees charged by a bank or other finance company may include registration fees or administration fees. 

If you choose a freight factoring service, they may charge between one and five percent of the load or invoice amount. Some companies may charge termination fees and will charge for ACH, wires, or direct deposits.

Payment

Consistent cash flow is not easy to maintain in the trucking industry. Start-up companies are especially vulnerable to negative cash flow problems. Clients don’t always pay on time, leaving brokers without the funds to pay carriers. 

However, with a line of credit or a factoring loan, freight brokers have a supply of cash readily available when it’s needed.

Qualifications

All factoring companies have specific qualifications for a freight finance loan. For instance, some may require a credit score of at least 530. They may also require that your company has been in business for 3 to 12 months with annual revenue of $100,000 or more. 

Also, it may take several days to qualify for a loan with some finance companies, and you may be required to sign a long-term contract.

Get Cash Flow Solutions with TAFS Financing

At TAFS, we specialize is factoring for trucking companies. Fleet managers often face high operating costs, from payroll to insurance to unexpected repairs. We help trucking countries across the nation reduce their operating costs and increase their cash flow.

Learn more about the benefits of invoice factoring or financing your freight business with TAFS, including opportunities for higher paying loads, 1-hour advance cash option, low factoring rates, and fuel discounts nationwide!

FAQ

How Do Freight Brokers Get Credit?

Brokers can apply for freight finance through bank loans, commercial loans, or factoring loans.

Are Freight Brokerages Profitable?

Depending on the number of customers, shipments, and experience, brokers can make from $40,000 to $500,000 per year.

What Percentage Does a Freight Broker Take?

Freight brokers take an average commission of 13% to 15% of gross margin on loads, according to FreightWaves.

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TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and a 1-hour advance option.