Starting a Brokerage

#21
Brokers don't factor invoices, not that I've ever heard of anyway. If you are a 3PL and have to factor you are showing your customers you are marginal at best. That would be embarrassing.
I disagree that the decision to factor should be viewed negatively. Like any form of leverage, it makes sense if used properly in the right circumstances, ie. to support growth.
 
#22
I disagree that the decision to factor should be viewed negatively. Like any form of leverage, it makes sense if used properly in the right circumstances, ie. to support growth.
I respect your opinion but I would be embarrassed to expose to my direct customer I was underfunded but I am sure there may be circumstances that would warrant it, personally for me, no chance.
 

loaders

Site Supporter
#23
As I have said before, there are situations where factoring invoices makes sense, and the services offered can be of real value to some businesses. However, I try to ensure that my customer base is made up of clients who pay within my terms allowing me to manage my cash flow effectively. I suppose that a new brokerage firm could benefit by factoring their invoices, but only until they are established and financially stable. If cash flow is a problem, then yes, look at factoring. If your finances are well managed, why give up any percentage of your profit?
 

Michael Ludwig

Well-Known Member
#24
I respect your opinion but I would be embarrassed to expose to my direct customer I was underfunded but I am sure there may be circumstances that would warrant it, personally for me, no chance.
Worse even ... what if one of your carriers ever found out you were factoring !!! You know we all talk on places like insidetransport.com ... LOL.
You would be out of business in a heartbeat.

@KeyFactor ... you are correct that factoring is a form of leverage to be used properly in the right circumstances. In my opinion, brokerage is not the right circumstance.
The biggest question that comes to mind is how would said broker manage his trust fund using factoring to manage his cash flow and cap ex?
Technically speaking, that broker has to put the promised funds in the trust account when the carrier accepts the load. Are you, the factoring company, going to advance the broker the funds based on the dispatch alone? I somehow doubt it as that would be a completely unsecured debt. Suppose that broker dispatches 1/2 a million dollars a week? You're in the hole 2+ million by the end of the month, completely unsecured. Add to that the turnaround on paperwork and ... I wouldn't want to be in your shoes.
The only way for you, the factoring company, to protect yourself is to be a signatory to the broker's trust fund account. That increases the risk that carriers will find out that a factory company supports a brokerage and reveals that he is/was underfunded to begin with. It also adds to the turnaround time on carrier payments. The signed cheque would have to go from the broker to the factoring company for their signature, then back to the broker to be mailed to the carrier. I wouldn't think an EFT arrangement would be in the factoring company's best interest. Truthfully, the factoring company would be better off hiring the broker as a sales agent and becoming the broker themself.
Like I said though, in my opinion, brokerage is not the right circumstance for factoring, simply because I fail to see how it would work. However, if I am anything, it's open-minded, and if I have erred in my judgement, please feel free to enlighten me.
 
#25
@Michael Ludwig and @loaders, correct me if I'm wrong, but funds only go into the trust when they have been received by shipper in advance of payment to carrier on a given load. If this is your situation, you have NO cash flow constraint and would not need to factor this customer. If the shipper pays more slowly, say in more than 30 days, or if the carrier wants QuickPay, the broker could factor invoices to that shipper and direct the factor to allocate a portion of the advances to the carrier either immediately at a discount (if carrier wants Quickpay) or in 30 days, in accordance with payment terms. There would be no trust implications here and the broker's relationship with carriers in enhanced because they pay promptly; the broker also covers it's factoring costs with QuickPay fees. The shipper must pay the factor directly. Do shippers care? In my experience, larger companies tend to have sophisticated AP operations that are very familiar with all forms of financing. They recognize that factoring is a valid tool in the right circumstances, such as to support strong growth. I used to work for a large public company with an $850 million factoring facility, so even larger companies use this strategy.

@FR84ME, factoring is not for everybody. If your growth is high and the bank won't support you for whatever reason, you MIGHT consider using factoring. Your customers, might not know or understand it, but if they are larger, they probably DO know about it and might also have other suppliers that factor. You have to decide if it's suitable for you.
 

Michael Ludwig

Well-Known Member
#27
Well, I'm not sure about the trust fund, that's why I'm asking (Hopefully a broker will chime in here). If the broker is not required to fund the trust account prior to the shipment, but only has to do so once he's been paid, then what is the function or purpose of the trust fund?
What that tells me is the carrier does not have to be paid until the broker is paid. That does not make sense because the law says differently. If memory serves, and frankly I don't want to look it up right now, but the TTA and Carmack both say the carrier is due payment either 7 or 14 days after the goods are received. Regardless of claims. Regardless if the payer of the freight charges has been paid for their goods and/or services or not.
Side note: shippers and brokers relish the thought of hanging carriers based on the BOL but conveniently forget their side of the contract, especially the payment part.
For my part I would like to learn a lot more about factoring. I have no use for it, but still would like to learn about it.
 
#28
@Michael Ludwig, I would ask @Scamchaser to chime in, but the trust provision applies, as I understand it, for cases wherein a broker receives funds from a shipper in advance of payment to the carrier. The broker must hold these funds in trust and not commingle them with other deposits. This ensures they cannot be used for the broker's general operational purposes and are available to be paid out to the carrier when due.

This does NOT mean that the carrier does not have to be paid until the broker has been paid; it simply means that funds received in advance must be set aside for the carrier. If the broker does not pay the carrier within the prescribed payment terms, the broker's credit profile will be negatively affected. Having said that, many brokers use the "pay when paid" approach, but they do so to their own detriment from a credit perspective.
 
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#29
Well, I'm not sure about the trust fund, that's why I'm asking (Hopefully a broker will chime in here). If the broker is not required to fund the trust account prior to the shipment, but only has to do so once he's been paid, then what is the function or purpose of the trust fund?
What that tells me is the carrier does not have to be paid until the broker is paid. That does not make sense because the law says differently. If memory serves, and frankly I don't want to look it up right now, but the TTA and Carmack both say the carrier is due payment either 7 or 14 days after the goods are received. Regardless of claims. Regardless if the payer of the freight charges has been paid for their goods and/or services or not.
Side note: shippers and brokers relish the thought of hanging carriers based on the BOL but conveniently forget their side of the contract, especially the payment part.
For my part I would like to learn a lot more about factoring. I have no use for it, but still would like to learn about it.
The Trust Fund is only used when the broker goes out of business then everyone files their claim for payment with the trust company and hopes the $75,000.00 USD Bond covers them. In almost all cases it doesn't. Also there is no mechanism in place to effectively park funds in the surety for the short term. The best protection is to use a quality broker with great credit and pays via EFT, Like us !!
 

loaders

Site Supporter
#30
That is correct keyfactor. As the name implies, the Trust account holds the monies paid by the shipper to the broker that are due to the carrier who completed the shipment. Your are technically correct Michael. As previously discussed on this forum, the broker is unable to pay the carrier until the funds are received from the shipper. As I understand it, the funds due to the carrier are to come only from the trust account, and if the funds are not there because the shipper hasn't paid yet, the carrier has to wait. In the real world however, most brokers, myself included, pay our suppliers within their terms regardless if our customer has paid us or not. What the courts have found ( and here is the spot for Scamchaser to jump in) in the event of a broker becoming insolvent and filing for bankruptcy, is in many cases the broker did not operate a trust account and comingled his deposits so that carriers who were owed funds received nothing. We all know that there are many brokers who overlook this requirement and most carriers do not seem to mind extending credit to them. As long as everything is good, no problem. If the broker runs into difficulty however, not having those carriers funds in a trust account could prove to be problematic. FR84ME, it appears that you confusing the US surety bond requirement with the Ontario HTA requirement for a trust fund. One has absolutely nothing to do with the other.
 
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#31
Good day gentlemen,

I am new to this forum and I must commend that the write ups here are very educative thus, I feel I should introduce myself to everyone.

I really would like to become part and parcel of the brokerage industry,not for any reason,but because I have a flair for Supply chain,basically Transportation.

Previousl I worked for a manufacturing company for a year as a logistics Manager in Toronto Canada,prior to this I backed up an educational training in Logistics and Supply Chain, and am presently writing my certification in Plog(professional Logistician).

The reason for signing up here,is to get information on how I can get started in establishing my own freight Brokerage company here in Toronto Ontario.

Please can anyone here be so magnanimous to guide me on how I can start up here in Toronto?


Thanks.
If you are looking to go to the USA I will gladly share who we got our bond from. We did a lot of research and found a reputable and fair priced company. Call me 800-457-8656 ext 102
 
#32
That is correct keyfactor. As the name implies, the Trust account holds the monies paid by the shipper to the broker that are due to the carrier who completed the shipment. Your are technically correct Michael. As previously discussed on this forum, the broker is unable to pay the carrier until the funds are received from the shipper. As I understand it, the funds due to the carrier are to come only from the trust account, and if the funds are not there because the shipper hasn't paid yet, the carrier has to wait. In the real world however, most brokers, myself included, pay our suppliers within their terms regardless if our customer has paid us or not. What the courts have found ( and here is the spot for Scamchaser to jump in) in the event of a broker becoming insolvent and filing for bankruptcy, is in many cases the broker did not operate a trust account and comingled his deposits so that carriers who were owed funds received nothing. We all know that there are many brokers who overlook this requirement and most carriers do not seem to mind extending credit to them. As long as everything is good, no problem. If the broker runs into difficulty however, not having those carriers funds in a trust account could prove to be problematic. FR84ME, it appears that you confusing the US surety bond requirement with the Ontario HTA requirement for a trust fund. One has absolutely nothing to do with the other.
You are correct , I was confusing the HTA requirement, I don't know anyone that uses that trust fund. We have always paid on time whether we get paid or not so we have not used that fund. Thanks for clarifying.
 
#33
Brokers don't factor invoices, not that I've ever heard of anyway. If you are a 3PL and have to factor you are showing your customers you are marginal at best. That would be embarrassing.
I have a buddy of mine who also has a brokerage he started about 1.5 years ago and he factored from the get go. Said it was one of the best things he has done.
 

loaders

Site Supporter
#34
As I mentioned, there are probably not too many Ontario based freight brokers that adhere to the trust account provision as described in the Highway Traffic Act (we do). For most successful brokers this does not present an operational problem.... legal problem....who knows. However, it can become trouble in the event of a bankruptcy. Courts can, and have, "lifted the corporate veil" in cases where no trust fund was in place. In other words, the principals of the insolvent firm can and have been held personally responsible for outstanding debts owed to unpaid carriers. So, for those out there that think if things go sideways with their business, they can just walk away and keep their homes, cars and other non associated assets, it might be time to think again. For carriers, the courts have shown a willingness to pursue the delinquent parties and often rule in the carriers favour. But, as we all know, getting a judgement in your favour and getting the monies owed to you, are two very different animals.
 
#35
Excellent point, @loaders. I'm pretty sure the corporate veil can be lifted in circumstances in which a party acts as a trustee of any assets under its control (eg. remittance of HST, source deductions and received shipper payments) for the benefit of another party.
 

Freight Broker

Well-Known Member
#36
Well, I'm not sure about the trust fund, that's why I'm asking (Hopefully a broker will chime in here). If the broker is not required to fund the trust account prior to the shipment, but only has to do so once he's been paid, then what is the function or purpose of the trust fund?
What that tells me is the carrier does not have to be paid until the broker is paid. That does not make sense because the law says differently. If memory serves, and frankly I don't want to look it up right now, but the TTA and Carmack both say the carrier is due payment either 7 or 14 days after the goods are received. Regardless of claims. Regardless if the payer of the freight charges has been paid for their goods and/or services or not.
Side note: shippers and brokers relish the thought of hanging carriers based on the BOL but conveniently forget their side of the contract, especially the payment part.
For my part I would like to learn a lot more about factoring. I have no use for it, but still would like to learn about it.
Big problem i see is carriers who don't submit invoices and pods in a timely manner if ever. Another is that carriers are generally all paid within a few hours of delivery as 90% now factor their receivables.
 
#37
Big problem i see is carriers who don't submit invoices and pods in a timely manner if ever. Another is that carriers are generally all paid within a few hours of delivery as 90% now factor their receivables.
@Freight Broker, I agree that it's a problem when invoices aren't submitted properly, but why is it a problem that carriers get paid quickly? I hope you appreciate that they have to absorb a lot of direct costs (fuel, salaries, insurance, lease payments) up front, so waiting as long as 90 days or more to recover those direct costs isn't really an option for many of them. To do all this on such slim margins is no small feat.
 

Freight Broker

Well-Known Member
#38
Not a problem that they're paid quickly.. problem is the perception that they're not. Most factor and as a result are paid within 48 hours. I know all about the importance of paying quickly as I pay my bills the day I get them.. always. And that includes factoring companies. Even though some of them report me at 30 days.. (I'm always in battle with them to report properly)..
 
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