How does a line of credit work for a freight broker?

Pay the carrier first, collect from the shipper later

A broker arranges a load, contracts a carrier at one rate and bills the shipper at a higher one. The difference is the broker's margin, and it is a small share of the invoice. The rest passes straight through to the carrier. So a broker's receivables are large relative to its earnings, and its biggest liability, the carrier payable, is tied load by load to those same receivables.

The need for a line comes from timing. Shippers commonly pay on terms of a month or more, and large shippers often longer. Carriers, many of them small fleets, want to be paid quickly; brokers compete for capacity by offering quick pay, a fast payment in exchange for a small discount, or by paying on standard terms. The table shows how the timing on each side sets the number of days the broker has to fund.

The implication is uncomfortable. The more a broker leans on quick pay to win carriers, and the more its volume shifts to large, slow-paying shippers, the more working capital it needs, even at the same revenue. A broker planning to expand its quick pay program should size the line for it first. The general method is in how lenders size a working capital line.

Why the carrier payable matters to the lender

In most lines of business, a supplier the borrower has not paid is the borrower's problem. In freight, an unpaid carrier can become the lender's problem. Depending on the terms and the circumstances, a carrier that the broker has not paid may pursue the shipper or the receiver for the freight charge. A shipper facing that claim may refuse to pay the broker's invoice, or pay the carrier and short-pay the broker. Either way, the receivable the lender advanced against does not turn into cash.

Lenders protect themselves in a few ways. Many set an availability reserve for carrier payables that are past their terms. Some require the broker to show, load by load, that the carrier was paid. A few structure the facility so that carrier payments flow from the lender-controlled account. The practical rule for a broker is simple: never slow-pay carriers to fund something else. It is the quickest way to shrink the line.

Lenders also look at the broker's net revenue, the margin after carrier cost, rather than gross billing, when they judge earnings and set covenants. A broker whose gross revenue doubled while net revenue per load fell has grown its collateral and weakened its credit at the same time.

The receivable is only as good as the carrier payment behind it. Carriers paid on time keep shippers paying the broker.

What makes a freight invoice eligible

The general rules are in eligible vs ineligible receivables. Freight adds its own.

Short-pays on fuel surcharges and accessorials, and credits after rate disputes, all count as dilution. A broker with tight rate confirmations and prompt paperwork will have lower dilution, which can mean a better advance rate.

Shipper concentration and credit

Brokers often grow by landing a few large shippers, and large shippers are both the best credits and the slowest payers. Two things follow. The concentration limit removes the excess over the cap from the borrowing base, and long terms push invoices toward the 90-day cut-off. A broker with 4,000 of eligible receivables and one shipper owing 1,600 would, at a cap of 25%, count only 1,000 of that shipper's invoices; eligible receivables fall to 3,400, and at an advance of 85% the broker can borrow 2,890 instead of 3,400.

Some lenders set a higher cap for a shipper with strong credit, and some brokers buy credit insurance on large accounts to support one. Lenders also look at the days sales outstanding by shipper, not just the total. Smaller shippers carry the opposite risk: they pay faster when they pay, and they fail more often, which is why a broker's own credit checks on new shippers are part of what a lender reviews.

The freight cycle, fraud and claims

Freight rates move in cycles. When capacity is tight, carrier rates can rise faster than the contract rates a broker agreed with shippers, and loads run at thin or negative margins until contracts reprice. When capacity is loose, rates fall, gross revenue drops and the receivable base shrinks with it. A line tied to receivables adjusts on its own in a soft market; what a lender worries about is margin compression in a tight one. Lenders ask for load count, revenue per load and net revenue per load by month across a full cycle if the broker has one.

Fraud is the other concern. Double brokering, where the contracted carrier secretly re-brokers the load and the actual hauler goes unpaid, and carrier identity theft both lead to disputes with shippers and unpaid carriers pursuing payment. Cargo claims do the same. Lenders ask how the broker vets and onboards carriers, how it monitors loads, and what contingent cargo and liability insurance it carries. They also check the broker's operating authority and its federally required surety bond or trust, and whether claims have been made against it.

Factoring or a line, and the reporting that comes with each

Factoring is common in freight brokerage. A factor buys each invoice, checks the shipper's credit, often collects directly and funds quickly, and it will work with a young broker that has little history. The cost is higher and shippers are told to pay the factor. A line becomes realistic once the broker has accrual financial statements, clean load-level reporting from its transportation management system and enough volume to support the monitoring. The move is described in moving from factoring to a line of credit, and the trade-offs in factoring vs asset-based lending and recourse vs non-recourse factoring. Transparent's lender book includes 235 lenders that write asset-based loans and lines and 116 that write factoring.

Reporting on a broker's line is frequent because the collateral turns over quickly: a weekly borrowing base certificate or daily collateral updates, a receivables aging and a carrier payables aging, collections into a lockbox, monthly financial statements and a fixed charge coverage covenant, often tested only when availability runs low. Field exams test invoices against rate confirmations, proofs of delivery and carrier payments.

What trips freight brokers up

• Stretching carriers to fund growth. Unpaid carriers become shipper disputes, and lenders reserve for them.
• Quick pay growth without a bigger line. Every carrier moved to quick pay adds days the broker must fund.
• Agent-based books. Where independent agents control shipper relationships, lenders ask who owns the customer and what happens if a large agent leaves.
• Paperwork lag. Loads without proof of delivery cannot be invoiced or borrowed against.
• Merchant cash advances. Daily payments and liens on the receivables a line lender needs; see consolidating and refinancing cash advances.
• A factor's lien left in place. Moving to a line requires the factor paid and its lien released; see UCC-3 terminations.

Preparing the file

From Transparent's line-of-credit checklist: an AR aging by customer with days outstanding; an AP aging, which for a broker means the carrier payables aging; the balance sheet and P&L; a year-to-date P&L through last month-end; a debt schedule showing existing liens and UCC filings, including any factor's; and, where available, bank statements and two to three years of business tax returns. For a broker, add a load-level report from the transportation management system that ties to the aging, monthly load count and net revenue per load, the top shipper list with terms, the operating authority and bond, and insurance certificates with the claims history.

Once the documents are in, Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day, and charges nothing before a loan closes. Buyers should read financing a freight brokerage acquisition, and the SBA's lending record in the industry is on the freight transportation arrangement data page.