A looming Capacity Crunch is an Opportunity to Revisit Carrier Payment Strategies
By Todd Ehrlich, CEO, BAM Worldwide
Sometime between now and December, 2017, thousands of freight haulers will be equipping their trucks with electronic logging devices prior to the enforcement deadline of the ELD mandate.
The impact of the new ELD rule will certainly be tighter capacity for brokerage and logistics providers, especially since many depend on small fleets and independent operators to cover their loads. Studies show that the majority of fleets with less than 10 vehicles are not currently using electronic logs.
Quick pay is one strategy that logistics providers will use to secure capacity in this new environment. This strategy is effective for several reasons. During the rate negotiation phase, carriers will be willing to soften their rates for fast-paying loads. A lower-priced load that pays in 10 days, for instance, may be more attractive than a higher-priced load that pays in 30 days.
Logistics providers that offer faster payment terms can also be more efficient at load placement. Instead of calling 10 carriers to place a load, only one phone call may be needed. With faster load acceptance, more loads can be moved for customers at a lower production cost to increase load count, revenue and margins.
Getting the right financial and technology levers in place to accelerate payments is not a temporary solution for a capacity crunch. It will become essential for long-term, profitable growth.
Many small and mid-size logistics providers may lack the working capital needed to speed payments to carriers. To support the cash flow imbalance of paying carriers before shipper customers pay on invoices, companies have traditionally used accounts-receivable (AR) financing or factoring arrangements.
While both options are useful, they can be expensive and cumbersome to maintain for an extended period of time.
Specialty lenders in the transportation industry are now using models that deliver funds precisely when and where they are needed to process freight transactions. Rather than borrow lump sums, logistics providers can tailor their financing to specific needs at the transaction level.
This is analogous to the difference between using traditional “enterprise” software and a software-as-a-service (SaaS) models. Enterprise software comes with high up-front costs for software licenses and maintenance, whereas the pricing of SaaS applications can be scaled to the actual number of transactions on a monthly basis.
Likewise, the finance costs for each freight transaction can be matched to the length of time that borrowed funds are outstanding. For instance, suppose a logistics provider agrees to pay a carrier in 10 days after load delivery. The company decides to use borrowed funds to pay the carrier. When the shipper pays the invoice at 30 days, the interest it is charged for using the funds is for 20 days (30 – 10).
Flexibility in the lending process will help logistics providers quickly respond to new business opportunities by offering payment terms to carriers that match their needs to secure capacity and rate commitments to grow their businesses.
As part of this transactional financing process, the lender can pay the carrier directly through electronic transfer, according to payment terms. A reliable, automated payment process reduces the lender’s risk, which results in a low interest rates and fee for the transaction.
The lender knows the funds are being used for the stated purpose of paying the motor carrier for a load that was picked up in Dallas and delivered to Atlanta, for instance, and that the funds are backed by a receivable from shipper XYZ. As soon as the carrier submits proof-of-delivery documents, the payment is scheduled automatically according to the payment terms.
Besides lowering the risk and cost of lending, the logistics provider has instant credibility with shippers and carriers since both parties know that the borrowed funds will only be used to pay the carrier on time, automatically, through electronic deposits.
As more of these automated funding transactions take place, the logistics provider sees its all-important “days to pay” credit rating improve in the carrier community. Growth will accelerate as more capacity becomes available to offer to customers to take on more loads.
With a seamless flow of funds, logistics providers can build relationships of trust by paying carriers on time, every time. That relationship of trust, and the flexibility to offer custom payment terms for each load according to the real-time needs and conditions in the freight market, will help companies separate themselves from the competition.