Factoring companies deal with freight brokerage business in one of three ways. Most simply turn down business from brokers, some companies factor for brokers and pay all the revenue directly to the broker, and then there are the companies that factor for brokers, but pay the actual carriers directly. Freight brokers that are seeking factoring should try to understand the reasons behind the different polices factors have about the freight brokerage industry.
Factoring Company Type 1: Does Not Accept Business From Brokers
There are a variety of reasons why most factoring companies simply turn down business from brokers. One of the top reasons on the list is ignorance. They don’t know the idiosyncrasies of the industry and choose not to gamble on something they don’t know.
Many factors stay out of this business on financial grounds. It takes little or no investment for a broker to start a business, so the net worth of most brokers won’t qualify under the financial standards that many factors use.
Factoring Company Type 2: Pays All Revenue to Brokers
Factoring companies that factor for brokers and pay all revenue to the brokers are scarce, but they do exist. The reasoning behind this policy is puzzling because it really boils down to two reasons:
- They are either lazy and want to take the easy path
- They are unaware of the court rulings on ownership of truck brokerage receivables
Freight broker’s receivables have a priority claim against them until the underlying carrier has been paid. This claim does not have a public filing to warn other creditors that a priority claim exists. To have this knowledge you must be aware of court rulings from 20 years ago where the carrier claim was upheld over a factoring company and created the precedent for future claims. Factors that use a bank line of credit to finance their operation are probably violating their credit agreements which usually call for all financed receivables to be contingency free.
Factoring Company Type 3: Pays Carriers Directly
Lastly, we have the factoring companies that factor for brokers but pay the underlying carriers out of the revenue generated from the receivables. These factoring companies are relatively rare also because the amount of administration involved in paying the carriers directly exceeds the capacity of most factors.
It should also be noted that the factoring companies that do pay the carriers directly haven’t been doing it very long and may not have the necessary infrastructure to be efficient. UC Factors, in 1975, became the first factoring company to have a program designed to factor for brokers and to pay the carriers directly. It was called the Freight Brokers Payment Plan and it was revolutionary (Custom software developed for UC Factors by Russ Opper, same Programmer who later came out with a franchise version of factoring software known as Factorsoft, now known as Cadence).
Freight brokers that used this service saw their business expand dramatically because their truck following exploded. This was due to the fact that carriers saw their invoices being paid by a financial institution which made them feel secure and earn the Freight Broker credit with these Carriers.
Factoring Rates for these two different services should not be compared, since a much higher administration workload goes into setting up and paying each carrier on a haul, vs one lump payment to the Freight Broker.
UC Factors has perfected that system for 44 years and can offer competitive rates for this service since we are the best in the country.
We always recommend anyone who is searching for a factoring company to take the time to do the research to make sure you are working with a factor who will be the right fit for your business. Sometimes, the lowest priced company is not always the best company or the best fit for your industry. Learn how to choose the right factor for your business here: