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ОглавлениеOne of the great things about the freight broker business is that it doesn’t require a tremendous amount of startup cash to purchase facilities and equipment. Theoretically, you can get up and running with just a computer, fax machine, and telephone—but it does require a substantial amount of cash or a significant credit line, virtually from day one (unless you opt to be an agent for another brokerage).
Precisely how much money you need depends, of course, on your business volume, but you need to have sufficient cash on hand to pay your carriers on time, and that will likely be weeks before your shippers pay you.
This fact cannot be stressed enough: Cash-flow management is critical in this business. If you don’t pay your carriers on time, they’ll stop accepting your loads. Although the industry is huge, in many ways, it is also like a small town—everybody knows everybody else’s business.
If you’re not paying your bills on time, it won’t be long before every carrier—and maybe even the shippers—find out about it. In a relationship business like freight brokering, a good reputation is essential, so protect yours by paying your bills on time.
You should monitor your cash flow constantly. Look at your receivables and payables on a daily basis. Cultivate fast-paying customers, and be sure your sales staff is explaining the need for prompt payment to new customers. There are specialized software packages designed for freight brokers that can help you properly manage your company’s cash flow and finances. DAT Solutions, LLC (www.dat.com/solutions) is one company that offers a variety of software and online applications for freight brokers. What’s great about these applications is that they’re modular and expandable, so once you learn how to use the application, it can easily grow with your business.
Successful brokers tend to take a conservative approach to financial management. “We don’t do a lot of borrowing,” said Bill Tucker. “We have a great credit rating and good cash flow, but we don’t want to just borrow and expand for expansion’s sake. We’re focused on service. We have a fiduciary relationship and responsibility to our carriers and to anybody else we owe money to, and to our employees.”
Ideally, you’ll open your doors with enough cash in the bank to pay all your expenses and your carriers until revenue from your customers (shippers) starts coming in. More practically, you may need to look at short-term credit options, such as unsecured commercial bank loans, borrowing against your accounts receivable, or selling your accounts receivable (a process known as “factoring,” which is explained in more detail later in this chapter).
You may have a tough time with conventional loan sources, because by traditional lending standards, most freight brokers would not be considered bankable. Even if you have a record of paying your bills on time, you will likely need a revolving line of credit significantly higher than whatever assets you have to offer for collateral.
Because you are billing your shippers, or sometimes the consignees, you need to set credit policies and procedures. When you extend credit, you do so under the assumption that the customer intends to pay, is capable of paying, and that nothing will prevent him or her from paying. Most of your customers will be honest and dependable when paying their bills, but that doesn’t mean you should blindly extend credit without first gathering and verifying information.
Each new customer should complete a credit application, and you should check the information he or she provides. This is standard practice in business. If a customer objects to completing a credit application, seriously consider whether extending credit to that customer is a safe thing to do. Look at it this way: When you extend credit for a service, you are essentially granting an unsecured, interest-free loan. Once the goods have been moved and delivered, you can’t take back the service—and you (depending, of course, on the terms of your carrier agreement) are responsible for paying the carrier whether or not the shipper pays you.
Thanks in large part to the old Interstate Commerce Commission regulation that required payment of freight bills within seven days, most shippers have systems set up to pay freight bills faster than other invoices. “In the old days, it was regulation,” Tucker said. “Today, it’s entirely contractual among the parties. But carriers usually have pretty narrow margins. [Trucking companies have] a serious financial burden to carry. [They have] to pay the driver, buy the fuel, buy the insurance, and make the loan payments on the equipment—all before the driver goes out the door.”
• Tax Facts
You’ve probably heard this most of your life: The only two sure things in this world are death and taxes. Businesses—including freight brokers—are required to pay a wide range of taxes. Keep good records so you can offset your local, state, and federal income taxes with the expenses of operating your company. If you have employees, you’ll be responsible for paying payroll taxes.
If you operate as a corporation, you’ll have to pay payroll taxes for yourself; as a sole proprietor, you’ll pay self-employment tax. Then there are property taxes, taxes on your equipment and inventory (minimal though it may be), fees and taxes to maintain your corporate status, your business license fee (which is really a tax), and other lesser-known taxes. Take the time to review all your tax liabilities with your accountant, and check out the taxes section in Entrepreneur Press’ Start Your Own Business for more information.
Cooperative shippers understand the economic realities of trucking, and that if truckers are going to stay in business, they must be paid promptly. But you will still have customers who will take as long as you allow them to pay. It’s your responsibility to set your terms and make those terms very clear to your customers.
You can include your terms (essentially when payment is due) on your credit application and have customers sign an acknowledgment that they know, understand, and agree to abide by your policies. On each invoice, clearly indicate the date the invoice will become past due.
Just because a customer passed your first credit check with flying colors doesn’t mean you should neglect to reevaluate their credit status. In fact, you should do it on a regular basis.
Tell customers when you initially grant their credit applications that you have a policy of periodically reviewing accounts so that when you do it, it’s not a surprise. Things can change very quickly in the business world, and a company that is on sound financial footing this year may be quite wobbly next year.
An annual reevaluation of all customers on an open account is a good idea—but if you start to see trouble in the interim, don’t wait to take action. Another time to reevaluate a customer’s credit is when they request an increase in their credit line.
Some key trouble signs are a slowdown in payments, increased complaints, and difficulty getting answers to your payment inquiries. Even a sharp increase in volume could signal trouble; companies concerned that they may lose their credit privileges with you may try to milk you while they can, and if they aren’t paying other brokers or carriers, they may have already lost some credit privileges and be looking to replace those sources. Pay attention to what your customers are doing; a major change in their customer base or product lines is something you may want to monitor.
Tucker says the process of providing good service to customers will also alert you to potential credit problems. “Just in the course of my relationship with the company, I talk to the president, I talk to the salespeople, I talk to the manufacturing people, I talk to the traffic manager, and even the guy who loads the trucks,” he says.
Changes in a company’s transportation needs and patterns can be early indicators of a problem. So what does Tucker do if he spots a red flag? “It depends on the details and on how serious it is. We may be [able to] help them solve their financial or market problem. But you also have to keep at arm’s length if they are getting into trouble. You have to either quietly be ‘running out of trucks,’ or tell them the salesperson will be in there every Friday to pick up a check.
“It’s our job to protect the money every way we can, including refusing to extend more credit and walking away from the business. Sometimes you just have to do that. But you have to know when, and you have to be able to evaluate those things. And we stay close enough to the customer so we can at least minimize the hit,” says Tucker.
Most customers accept routine credit reviews as a sound business practice. A customer who objects may well have something to hide—and that’s something you need to know.
Certainly cash flow is important to any business, but it is critical to a freight brokerage. You need to keep sufficient cash on hand to pay your regular operating expenses and your carriers, but not so much that you miss out on revenue from alternative investments. In addition, you need to take steps to protect your company from internal theft.
tip
Often, employees are motivated to steal by the feeling that they are being underpaid or that the business owner is making excessive profits on workers’ efforts, so the employee feels “entitled” to steal. Help prevent this attitude by paying fair wages and treating your employees with respect.
Before you hire your first employee, set up internal controls to safeguard your assets and assure maximum cash flow management. One such control is to require proper authorization of transactions. Be specific as to which individuals are authorized to carry out what tasks, and hold them accountable for their actions.
You’ll also want to establish a separation of duties so the person responsible for custody of an asset is not also responsible for record keeping that same asset. This prevents someone from stealing and then changing records to cover up what he or she has done.
Be sure the records you keep are adequate to satisfy financial and tax reporting requirements, as well as the federal regulations governing freight brokers. However, you should limit access to both assets and documents to prevent unauthorized use or theft; keep access on a needs-only basis.
Finally, set up a system to independently verify individual performance. Someone who was not involved in the work should check it for accuracy. This will help uncover intentional theft and fraud, as well as unintentional errors.
Beyond techniques to protect your assets, you’ll also need systems to maximize them. Consider these:
• Set up a sweep account. This is a service banks offer that lets you earn the maximum interest on all the money in your accounts, even if it’s just overnight, without penalties or concerns of bouncing checks. The system is set up so funds are automatically moved—or swept—in and out of the appropriate accounts each day. If your banker is reluctant to set you up with this type of an account, shop around for one who will.
• Use a lockbox for receivables. Another bank service, a lockbox, works like this: Your customers mail their payments to a post office box that your bank rents in your company’s name. The bank sends a courier several times a day to clear out the box, checks are immediately deposited into your account—literally within hours of their arrival in the mail—and you get a report outlining all the transactions in as much detail as you want, as frequently as you want. Lockboxes mean you no longer have to run to the bank with deposits, or spend your (or one of your staff member’s) valuable time opening envelopes, recording payments, and preparing deposits.
• Accept electronic payments. Talk to your banker about getting set up so you can accept payments through electronic transfers.
• Invoice on a timely basis. You can’t expect customers to pay until you’ve issued an invoice, so get your invoices out as soon as you know what all the appropriate charges on a given shipment are. Be sure you include whatever documentation is necessary (copies of bills of lading, delivery receipts, etc.) for your customers to pay promptly.
• Enforce your payment terms. Be prepared to follow up on late bills 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.
warning
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.
warning
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.
warning
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.
