By: Todd Ehrlich, CEO, BAM Worldwide
Cash flow is the lifeblood of every business. An abnormal heartbeat is expected whenever revenues decline and customers delay payments, but even during boom times cash flow has to be carefully managed to survive.
In the transportation industry, freight volumes are expected to grow by more than three percent for the next few years with rates continuing to rise. Despite what should be a good business environment for brokers, many small and mid-size companies are hanging on for life.
Cash flow problems of brokers are rooted in the fact that they operate as virtual banks for shippers and carriers. Shippers are asking brokers to extend credit for to 60 days while carriers have shortened their expectations. To compete in a very tight capacity market, brokers are paying carriers within 28 days and often 14 days or less out of necessity.
Keeping a strong credit rating is critical no matter how market conditions change. A low “average days to pay” gives the broker an instant advantage. Brokers that pay quickly are able to move more loads and get better rates from carriers who are willing to soften their margins to accelerate their own cash flow.
Holding onto this competitive advantage is easier said than done. To maintain strong credit scores and keep a healthy cash flow, brokers will often need an infusion from a bank line of credit or other forms of accounts receivable financing. These traditional cash management strategies are often a hassle to obtain and do not offer sustainable, long-term solutions.
Another drawback of traditional financing is brokers not being able to access the amount of capital they need to grow their businesses. This should not come as a surprise as brokers do not make good lending clients, at least on paper. On average, 85 percent of their revenues pass straight through to carriers. Another drawback is the high cost of financing that eats away their profits.
A new and alternative approach is for brokers to use an accounts receivables-backed cash management platform. A platform approach, described below, makes it possible for a lender to effectively combine technology with capital to offer a specialized payments program to help brokers grow their businesses and operate more efficiently.
The Platform Defined
Consider a scenario where a broker offers two loads to the same carrier. The only difference between the loads is that the first pays in 30 days and the other pays two days from delivery. Would it be surprising if the carrier wants $1,550 for the first load and only $1,400 for the second? Not at all.
The carrier’s margins are much less sensitive when it knows payment will be made in two days versus 30. From a lender’s perspective, the investment risk of lending to the broker is minimized by using a platform that ensures that broker is paying its carriers quickly and consistently.
The broker benefits from this arrangement by operating more efficiently and being able to grow its business by moving more loads for its customers.
The payments platform that accompanies a specialized lending program of this nature should consist of four parts:
- A payments management system that brings transparency and standardization to the relationship between brokers and carriers. Brokers can use this and other features to coordinate their capital lending needs with incoming payments from shippers and outgoing payments to carriers.
The payments system can be combined with features common to transportation management software (TMS) systems such as load offers or tenders. When a broker offers a load to a carrier electronically, the carrier can see the payment terms and accept the load, which automatically initiates the payment process once the delivery is confirmed.
A cash management platform does not have to replace the TMS systems that brokers already use to operate their businesses. Rather, it should be capable of integrating with existing TMS platforms to support and enhance the relationship between brokers and carriers by providing the capital and automating the payment process, among other vital services.
If a traditional TMS platform were compared to an iceberg, a cash management platform would be the underwater portion that stabilizes the structure.
- A streamlined approach to receiving proof-of-delivery receipts and other paperwork from carriers to initiate payment. Document scanning applications and services from Pegasus TransTech, for example, enable carriers and owner operators to submit documents electronically using truckstop scanning, any Windows-based PC or by using a mobile application. Carriers can download the software for free.
Once delivery confirmation is received, an account payable to the carrier and account receivable from the shipper can be opened automatically. At this point the countdown officially begins for the payment due date. If the payment is set up to be paid in two days from receipt of delivery, for example, payment is posted automatically in the carrier’s bank account in two days.
- A process to manage receivables from shippers without interfering with brokers’ relationships. Traditional accounts receivable financing and factoring agreements take the billing and collections process away from the broker. Brokers can use cash management platforms that lend funds to them directly without requiring the shipper to pay a third party. If the shipper does not pay the invoice submitted a broker within 65 days, the funds advanced to the broker can be taken back automatically.
- A simple, transparent cost structure that charges the broker a fee, per transaction, in exchange for automating quick payment to carriers. The broker should have the option to use its own capital to pay carriers or to borrow capital to make the payment. The broker can make this decision on a load-by-load basis. If the broker borrows funds, there is an additional interest charge based on the number of days outstanding for repayment.
On a per-load basis, this cost of capital pays for itself by brokers increasing their margins and moving more loads by being able to pay carriers faster. As a real-world example, one broker that recently began using a cash management platform has been able to increase its margin per load from $98 to $122 by shortening its payments to carriers from 30 days to between five and 20 days.
Cash management platforms represent an alternative to traditional lending and factoring arrangements. They combine technology, standardization and capital to make all parties in a freight transaction more efficient. Shippers, for instance, are more likely to use brokers when they know the broker is using a trustworthy payment platform to pay carriers. A cash management platform also makes brokers more competitive in the market and operate more efficiently, all of which lessens the cost of capital.
Creating a convenient way for brokers and carriers to conduct business, process payments and manage cash flow will not be considered an “alternative” for long. For brokers looking to grow their business and sustain a competitive advantage, this could quickly become the standard for the new age.
Todd Ehlrich is Chief Executive Officer of BAM Worldwide, a financial technology and specialty lender for the transportation industry.