The majority of the loads moved within the U.S. are done so with a promise to pay, which leads to negative cash flow. Anyone interested in becoming a freight broker should be asking themselves a few questions after reading that statement. A promise to pay..….who and when? When does the carrier get paid? When does the broker get paid? What do you mean by “negative cash flow”? And, what does this mean for the freight broker? Negative cash flow is one of the many topics that we cover in all of our freight broker courses, but in this post we’ll answer a couple of those questions for you.
Standard Payment Terms and Paying the Carrier
Throughout the transportation industry, the usual terms for payment of freight invoices is within 30 days of receipt of the Bill of Lading (BOL) and the invoice. These standard payment terms are often referred to as “Net 30”. Now, the first important cash flow detail all prospective freight brokers need to be aware of is that, without a doubt, trucks want to be paid as soon as possible. And, in an attempt to ensure payment ASAP, carriers will request special payment terms, such as advances, either full payment advance or a partial advance. If and when carrier advances are refused by the broker, carriers will then usually request “Quick Pay”, which means full payment of their invoice faster than the standard terms of Net 30.
Whether or not you allow or offer your carriers advances or Quick Pay is up to you. But, any freight broker wanting to stay in business longer than a few months should make it an absolute top priority to pay all of their carrier invoices within Net 30 at the very latest. Slow payments to carriers will definitely hurt a freight broker’s invoice related credit scores, making it very hard for the broker to be able to find a truck willing to move the broker’s loads.
Collecting from Shippers
Freight brokers use the standard Net 30 terms to pay their contracted carriers and they invoice their shippers with similar Net 30 terms. Here’s the second important cash flow detail all prospective freight brokers need to be aware of – shippers want to wait as long as possible to pay their freight bills. Advances and Quick Pay are benefits that brokers can choose to offer to their contracted carriers. While, on the other hand, most shippers refuse to agree to any payment term that is less than Net 30. And, in fact, Freight brokers are often forced to wait beyond the Net 30 terms to actually receive payment from their shippers. Unfortunately, this is a long-standing and generally accepted practice within this industry.
How and Why Negative Cash Flow is a Problem
As a freight broker, you must pay your contracted carriers by Net 30, or even sooner if you agreed to pay carrier advances or Quick Pay. However most of the time, you, the freight broker, won’t be paid by the shipper until sometime after Net 30. This means that before you receive payment from the shipper, you will need to be prepared to cover as much as 85% of the total load costs for each load that you move. And, this is where negative cash flow directly impacts freight brokers.
All successful freight brokers understand that negative cash flow is an issue that can’t be ignored. If you’re going to broker freight, it’s essential that you have access to cash. Because, for every load you move there will also be a carrier invoice you’ll need to pay soon thereafter. Plus, while carrier invoices are one of our largest expenses as freight brokers, they aren’t our only expense. While you’re waiting to receive your payment from the shipper, you’ll also need some cash to cover your usual brokerage operating expenses.
Traditional methods for accessing large amounts of cash for business purposes include: using your own money (savings, a personal loan), obtaining a business line of credit, and obtaining a business loan or a capital loan. Of course, there are pros and cons to each of those options and for quite a few people the cons outweigh the pros. The good news is that if those traditional options don’t appeal to you, there is another way. Freight brokers can solve their negative cash flow problem by factoring their invoices. Stay tuned, more on factoring to be featured in a future post.