What Are Broker Credit Checks and Why Do They Matter in Factoring?
When you factor your loads, the creditworthiness of the brokers and shippers you haul for matters. That's because the broker or shipper is ultimately responsible for paying for the load that the factoring company purchases.
This is where broker credit checks come in. Broker credit checks can help determine whether a broker is approved for factoring and how much credit the factoring company is willing to extend to that broker.
Understanding how they work can help you avoid accepting a load your factoring company won’t fund.
What Is a Broker Credit Check?
A broker credit check evaluates a freight broker's or shipper’s creditworthiness and payment history to help determine the likelihood that they will pay their invoices.
Depending on the factoring company and credit information available, the review may consider things such as:
- Payment history
- Average days to pay
- Outstanding balances
- Credit rating
- Financial stability
- Credit limits
- Other payment risk indicators
The factoring company uses this information to determine whether it is comfortable funding loads for that broker or shipper.
For carriers, broker credit checks can also provide insight into who you're hauling for before you accept a load.
Why Do Factoring Companies Check Broker Credit?
Freight factoring involves selling your unpaid loads to a factoring company in exchange for faster access to the money you've already earned.
Once the factoring company funds your loads, they invoice your broker or shipper and wait for them to pay. Because of this, factoring companies care heavily about the creditworthiness of the business responsible for paying the invoice.
A carrier may qualify for freight factoring, but that doesn't necessarily mean every broker they haul for will be approved. The factoring company typically evaluates each broker or shipper and determines whether it is willing to factor loads hauled for that customer.
What Does It Mean When a Broker Is Approved for Factoring?
An approved broker is generally one that meets your factoring company’s current credit requirements.
However, a broker’s credit can change over time. Changes in its payment history or financial situation could affect its approval status or available credit, which is why it’s important to check broker credit regularly.
What Happens if a Broker Isn't Approved?
If your factoring company doesn't approve a broker, it may not factor loads from that broker.
That doesn't necessarily mean you can't haul the load. It means you need to wait for the broker to pay you directly rather than receiving your money through factoring.
For a carrier that relies on factoring to cover fuel, payroll, maintenance, and other operating expenses, that can create an unexpected cash flow problem.
This is why it's important to check a broker's factoring approval before accepting the load.
You don't want to deliver a load and submit your paperwork only to find out that the load isn't eligible for factoring.
How Broker Credit Checks Affect Non-Recourse Factoring
Broker credit checks can become even more important with non-recourse factoring.
With non-recourse factoring, the factoring company assumes the risk of not getting paid from the broker or shipper.
However, non-recourse doesn't necessarily mean every invoice is protected from every type of non-payment. Typically, the broker or shipper must first be credit-approved by the factoring company, and the load must meet the requirements outlined in your factoring agreement.
For example, if you haul for a broker that isn't approved for non-recourse factoring, you shouldn't assume the load will automatically receive non-recourse protection.
Coverage can also be limited to specific situations, such as a credit-approved broker becoming insolvent or filing for bankruptcy. Disputes, missing paperwork, fraud, cargo claims, or other issues may not be covered.
Always review your specific factoring agreement so you understand exactly what your non-recourse protection includes.
Why Should You Check Broker Credit Before Accepting a Load?
You already have expenses tied to every load you haul.
You're paying for fuel, insurance, maintenance, driver expenses, and other operating costs. The last thing you want is to complete a load and then discover that your factoring company won't purchase it.
Running a broker credit check beforehand can help you determine:
- Whether the broker is approved for factoring
- Whether enough credit is available for funding
- Whether the broker has a history of reliable payments
It gives you more information before you commit your truck, time, and money to the load.
Do Factoring Companies Offer Free Broker Credit Checks?
Not all factoring companies offer the same tools and services, which is why it's important to look beyond the factoring rate when comparing providers.
Consider whether broker and shipper credit checks are included and how easily you can access them before accepting a load. Ideally, your factoring partner should make it simple to check new brokers and recheck existing ones as their credit changes, without charging you each time.
At Aladdin, broker and shipper credit checks are free for factoring customers, helping you know whether a customer is approved before you haul.