Freight Broker Factoring

Freight broker factoring is a sub-specialty of transportation factoring. Few factoring companies have the human resources, practical experience, and expertise in freight brokering to provide the services freight brokers require. Interstate Capital not only specializes in factoring for freight brokers, but it has developed its own proprietary online system called FreightPayableSystems.com (sm), or “FPS” for short.

The genius behind FPS is that it assists the freight broker and ICC in matching accounts receivable due from the shipper/consignor through the freight broker and finally to the carrier that hauled the freight and delivered it to the consignee. It is this matching principle that eludes so many in the freight brokerage industry and that accounts for so many business failures among freight brokers.

FPS assists the freight broker by ensuring that the cash generated from a freight movement is set aside or paid to the carrier that moved the freight. So many freight brokers get into trouble when they receive a payment for a movement and use those funds for something other than paying the corresponding carrier. When it comes time to pay the carrier, the freight broker is then in the position of having to use the proceeds from a new transaction to pay the outstanding fee. FPS helps to avoid this predicament.

Shipper/Consignee———————→Freight Broker—————————>Carrier
(Pays Freight Broker)——————→(Pays Carrier)—————————>Happy Camper!

The simple illustration above depicts an ideal transaction in which a shipper pays the freight broker for the shipment of goods from a consignee to a consignor. The freight broker then forwards to the carrier its amount due, and the difference, or broker’s commission, is retained by the broker as its reward for arranging the transaction.

Too often, however, the freight broker receives payment from the shipper but fails to pay the carrier that moved the freight because funds the freight broker thought would be available for that purpose never materialize. The carrier’s attorney then files a claim against the freight broker’s bond and sends a demand letter to the shipper/consignee, informing them of the carrier’s right to receive payment— even if it means the shipper has to pay twice.

This scenario presents a particularly dreadful situation if there is a factoring company involved in any part of the transaction. If the freight broker is factoring its accounts receivable, the factor has the right to expect that the funds it is advancing to the freight broker are being used for the express purpose of paying the carrier first and everything else second.

All freight brokers must obtain a license (an MC number) from the federal government. That license creates a constructive trust for the benefit and protection of carriers. Among other things, freight brokers are supposed to maintain records that segregate funds payable to carriers from their general operating funds. FPS helps freight brokers remain in compliance with federal regulations by keeping the constructive trust intact.

Interstate Capital’s freight broker clients must enter the names of their shippers/customers and the names of their carriers into FPS before starting. If our freight broker client wishes to factor a load and the customer name and the carrier for that load are missing, FPS will ask for that information before proceeding.

For each invoice our freight broker client requests to factor, FPS matches the receivable due from the shipper to the corresponding carrier payable. Through FPS, the carrier will be paid electronically within 48 hours via ACH transfer. The freight broker may elect to charge the carrier a prompt payment discount fee (which will automatically be deducted from the carrier’s payment) or elect to set the carrier’s funds aside in reserve and have FPS pay the carrier electronically 30 days later. Some of our freight broker clients will not charge the carrier a fee in either event, but will just build the factoring cost into the per mile or flat rate it negotiates with the carrier on the load confirmation form.

FPS is the only online factoring system designed exclusively for the freight brokerage industry and is available only to freight brokers who factor accounts receivable with Interstate Capital.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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