Transfix, the New York City-based digital freight brokerage, announced this morning that it is offering a payment factoring service for carriers in its network at a cost of 0.99 percent.
Factoring, a widespread financial service in the transportation and logistics industry, fills the gap in carriers’ cash flow created by lengthy shipper payment cycles. Up to 30 days after a load is delivered, a shipper will pay the broker, and then another payment cycle may take place before the broker pays the carrier. Delayed payments strain carriers’ cash flows, especially small fleets and owner-operators, and tend to put carriers at a disadvantage in any kind of dispute over a payment (for example, detention and other accessorials).
In order to develop a loyal carrier base, financial institutions – banks like Triumph – and freight brokerages throughout the years have offered to finance faster carrier payments. A typical factor might charge 2 percent interest on what amounts to a 30-day advance, so that a carrier instantly gets 98 percent of what it is owed instead of waiting 30 or 45 days for 100 percent. It doesn’t sound like a lot, but annualized, factoring fees can be equivalent to a 24 annual percentage rate (APR), which is comparable to a credit card.
Brokerages offering factoring services include C.R. England, Nolan Transportation Group and Ryan Transportation Services. J.B. Hunt waives quick pay fees for loads booked through its digital platform 360. Uber Freight and Convoy also have free quick pay as long as the load is booked through their apps and the drivers enable location services on their mobile device through the whole shipment.
Transfix, which is partnering with BAMFi on the factoring service, says that Transfix’s technology, ease of use and cost will make it a superior product compared to other factoring services. FreightWaves spoke to Transfix co-founder and chief executive officer Drew McElroy by telephone.
“We all know the pain drivers have from a cash flow perspective,” McElroy said, “and frankly I have a low opinion of existing factoring companies in terms of cost of capital and hurdles guys have to jump through. We’re involved in the transaction and have the data, so it’s a natural extension and a place for us to add value.”
McElroy said that factoring payments was one more way that Transfix could continue its journey from a digital freight marketplace to a true platform company that quickly spins up value-adding services for both sides of the market, shipper and carrier. He recounted the history of eBay, which constantly added tools that drove incremental value for sellers.
“It empowered sellers to make their own businesses more sophisticated and ultimately more profitable, and it’s the same opportunity for us,” McElroy said.
The question is what is Transfix’s plan to automate factored payments, especially in a world where multiple credit and financial data breaches have led to persistent issues with identity theft and fraud. One of the reasons why factoring can be a relatively high-cost credit product when considered on an APR basis is that it’s extremely labor-intensive to process individual payments and account them accurately.
McElroy said that Transfix’s compliance team, which on-boards carriers, does a good job of vetting the companies. In addition, the visibility Transfix’s platform gets into the movement of carriers allows it to flag illegal or suspicious patterns that do not conform to the typical behavior of professional truck drivers.
“Our system is pretty good at recognizing truck driver behavioral patterns,” McElroy said. “We’ve caught fraud based on drivers acting strangely. It’s not perfect and it’s not law enforcement, but relative to a normal factoring relationship, we already know the carriers and the credit risk is pretty minimal. It’s a different risk profile than a traditional outsourced factoring company would have.”
McElroy also pointed out that, as a freight brokerage responsible for the load, Transfix would be much more concerned about the value of the cargo itself than the payment for its transportation in the event of a criminal act.
“We’re already taking a lot of the risk out of the transaction and we might as well perform this service as well,” McElroy said. “This is low-hanging fruit, to be blunt about it.”
In general, McElroy said, Transfix is continuing to build products and services to reach deeper inside of its partners’ operations so that it can find places to add value. What was a competitive differentiator five years ago, like end-to-end visibility, he said, is now “table stakes,” and it’s a constant iterative process to identify and solve pain points on both sides of the marketplace.
“We strongly believe in enriching our ecosystem with value for drivers that they get just by being associated with us,” McElroy said. “The growing enthusiasm of our drivers is palpable.”
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