Do brokers know their back offices can increase profit margins by reducing carrier costs?

Truck drives down road in the desert

When rates soared and capacity tightened in 2018, brokers recognized the value of building stronger relationships with their carriers. However, when capacity loosened in 2019, carriers lost pricing power and many of those relationships ended when hundreds of trucking companies went out of business.  

The current freight recession has caused many brokers to make changes to prevent further erosion of their carriers. Some have responded by identifying carriers they believe are critical to servicing their customers, and they’ve given those carriers the right of first refusal on matching loads. To increase carrier loyalty, other brokers have taken steps to improve their carriers’ cash flow.

“When carriers know they will be paid promptly for the services they provide, they are more likely to accept our next load,” said T.J. Lacey, Director of Project Management and IT at Zipline Logistics in Columbus, Ohio. 

“In some cases, a broker’s payment policy is more important than the rate it pays the carrier,” said Jason Kirkpatrick, Operations Manager at Level One Technologies in Maryland Heights, Missouri. “The ability to process payments quickly is a requirement, especially for brokers who offer early payment options, and allow their carriers to select a different option on each invoice they submit. In our experience, the ability to process and pay a carrier’s invoice on the due date is an essential component of being viewed as a trusted and reliable broker. It’s also a necessary part of being able to attract and retain enough quality carriers to make future growth possible.”

Although growth is a worthy objective, not every broker offers early payments to its carriers as a way to achieve growth. In fact, a majority of brokers offer early payments as a way to earn discounts and increase profits. Other than the cost of funds to release money early, they know there are no expenses associated with a discount. That means, up to 90% of any discount falls directly to their bottom lines. 

To illustrate the impact of these savings, let’s assume a broker agrees to pay a carrier $2,000 for a load it’s being paid $2,350 by the customer. If the broker’s cost of funds is 5% and the carrier agrees to a 3% discount for next day payment, the savings would be computed as follows:

After deducting the cost of funds, the discount reduces the broker’s cost by $52.30, to $1,947.70 ($2,000 – $60 + $7.70). Prior to the discount, the broker’s profit margin was 14.9% ($350/$2,350). After the discount, the broker’s profit margin ($350 + $60 -$7.70)/$2,350) increases by 2.22%, to 17.12%. A summary of this analysis shows that a 3% reduction in the load’s cost caused the profit margin on the load to increase by 14.9% (2.22%/14.9%).   

If brokers want to experience similar results for their own companies, it’s important to set discount rates that are appealing to the carrier.  Recent experience has shown that carriers, who don’t regularly factor invoices, are more likely to accelerate payments, when the discount rate charged by the broker is 3% or less.

Although this rate is higher than the rates (1.5 to 2%) currently charged by most factors, brokers should not be dissuaded from competing with factors in the early payment space. That’s because, unlike brokers, there are two important differences in a factor’s relationship with its carriers that can significantly reduce or eliminate the factor’s rate advantage.    

The first of these differences are the “hidden” fees charged by factors that increase a carrier’s total cost. Examples of these fees include wire, or ACH fees, that carriers must pay each time a factor sends them money. These fees can be as high as $18 per transaction. Other fees, unique to factors, include interest, maintenance fees, missing notation fees, and monthly minimum fees.  

The second difference is the requirement that carriers must place 10 to 15% of the value of each invoice in a reserve account, and keep it there for 30 days or more. These funds protect the factor against any losses they may incur, from invoices, purchased from the carrier, that later become uncollectible. Since the factor has little control over when an invoice is paid, the carrier’s reserve remains at risk, until the customer remits payment to the factor.

Because these requirements add both cost and risk to a carrier’s factoring relationship, brokers who are interested in paying their carriers directly should explain to them how their discounting programs can avoid these issues.

Before taking this action, brokers should first review their back-office systems and procedures, to make certain they’re capable of processing a high volume of discounted invoices efficiently and in a timely manner.  If the review shows that existing systems are unable to achieve these objectives, it may be necessary to install specialized software, that’s capable of automating the workflow that’s required, to process and pay these transactions.

If this is not done, it’s likely that the discounts received from carriers will be consumed by processing costs; which means, they won’t contribute to the company’s bottom line. Fortunately, systems are available that can dramatically reduce the human activity and cost associated with processing these transactions.

To illustrate the savings potential of these systems, a study by the Aberdeen Group showed that when paper based systems are replaced with their electronic equivalents, the human activity to process and pay transactions is reduced by 65%. The study also showed that these savings are a major reason why it costs 60% less to process and pay invoices electronically.

Although the study doesn’t mention any systems that are currently available and capable of achieving these results, one system that has been undergoing continual development since it was first launched in 2009 is Epay Manager, a fully electronic invoice presentment and management system, developed by Level One Technologies.

A review of Epay’s functionality shows that the system proactively creates and sends invoices to a broker’s carriers and customers, based on data that resides in the broker’s TMS. Based on the experience of brokers who currently use the system, these invoices are up to 99% accurate.

To facilitate the review and approval process, Epay has built-in tools that allow carriers to submit documents, select early payment options and request changes whenever necessary. Other tools allow brokers to create special workflows and set parameters that guide transactions through an automated audit, approval and payment process. This unique configuration creates many benefits for both brokers and carriers who use the system.

Carriers are able to avoid lengthy processing and audit delays that are typical of many traditional invoicing systems. They’re also able to manage their cash flow by selecting early payment options, whenever necessary, on an invoice by invoice basis.

Brokers are able to approve and pay invoices more accurately and efficiently, in as little as one day. They’re also able to automatically bill their customers with Epay at a payable status of their choosing.

Most importantly, because no other system has Epay’s unique blend of features and benefits, brokers who use Epay are often viewed, by carriers, as being more trusted and reliable.

Epay’s efficiencies are derived from its web-based, dual view design, which allows users to process and pay transactions and bill customers, using pre-planned, customized workflows and software intelligence. When fully implemented, the system is capable of lowering a broker’s A/P processing cost by up to 75%, as well as a broker’s A/R processing cost by up to 99%. In addition, when brokers use the system’s early payment module, the system can lower their direct carrier spend by up to 1.12%.

“With Epay, the carrier knows at all times where their invoice is in the approval process, how much is going to be paid, and when,” said Lacey. “Epay has enhanced our relationships with factoring companies, by providing them with complete transparency of the settlement process, that’s similar to what we provide our carrier partners. We communicate the discount options while onboarding carriers and present the discount options again at the time of invoice generation.”

Zipline Logistics, a non-asset service provider with 75 employees, has been using Epay for almost three years. Prior to implementing the software, Lacey said the carrier settlement process was very labor intensive and lacked the potential for scale.

According to Kirkpatrick, “Electronic payment systems benefit brokers and carriers in mutually beneficial ways. One of the most important of these are the financial benefits both parties experience whenever flexible payment options are offered to carriers. At a higher level, systems like Epay can help create flexible and cooperative relationships between brokers and their carriers. In an uncertain economy, these relationships are becoming extremely important  to new customers, who place a higher value on brokers with a growing number of loyal and satisfied carriers.”