As a new freight broker, establishing and building strong business credit is crucial for long-term success. A solid credit profile can help you secure favorable terms, obtain financing when needed and build credibility in the industry. In this blog, we will explore how new freight brokers can build their business credit and discuss some of the strategies to accomplish this goal.
Table of Contents
- I.Understanding Business Credit
- II. Establishing Business Structure, Documentation and Business Bank Accounts
- III. Establishing Trade References and Vendor Accounts in Addition to Carrier References
- IV. Clarifying Freight Bill Factoring and Business Credit
- V. Monitoring and Maintaining Business Credit
- Conclusion
Understanding Business Credit
Before diving into the process of building credit, it’s important to have a clear understanding of what it entails. Business credit refers to the creditworthiness and financial history of a business entity, separate from the personal credit of its owners. It includes factors such as payment history, credit utilization, length of credit history and public records.
Establishing Business Structure, Documentation and Business Bank Accounts
To begin building business credit, you must establish a separate legal entity for your freight brokerage, such as a corporation or limited liability company (LLC). This separation is essential for distinguishing personal and business finances, protecting personal assets, and building an independent credit profile. Obtain the necessary licensing, bond and authority for operating a freight brokerage and ensure compliance with applicable regulations.
Next, acquire an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). An EIN is a unique identifier for your business and is essential for opening business bank accounts and establishing credit accounts.
Once you have your legal structure and EIN in place, open a business account dedicated solely to your freight brokerage. This account will serve as a central hub for managing your business finances and tracking transactions. Maintaining separate accounts ensures that personal and business expenses remain distinct. Use the account responsibly, pay bills on time, and maintain a healthy cash flow.
Establishing Trade References and Vendor Accounts in Addition to Carrier References
Ideally you would like to have carrier references reported to the major transportation credit bureaus but we all know many new brokers have not had the opportunity to move freight due to their lack of credit history. Therefore, generating trade references is a valuable way to initially establish a positive credit history. Consider opening vendor accounts with companies that offer products or services specific to the freight brokerage industry, such as load board providers or software vendors. Ask these vendors to report your payment history to business credit bureaus such as TransCredit, Ansonia and Dun & Bradstreet.
Once you have a handful of loads moved under your belt, now it’s time to start making your credit profile as robust as possible with carrier references. Most major carriers, and/or their factoring firms report to the major credit bureaus. Unfortunately, many of the smaller carriers and owner operators do not report payment experiences to credit bureau, so don’t be alarmed if every payment you make is not reported and reflected in your corporate credit profile. Maintain open lines of communication with your carriers and ask them if they would allow you to list them as a reference. It is important to remain vigilant and proactive when trying to build credit.
Clarifying Freight Bill Factoring and Business Credit
There is a common misconception among new freight brokers that partnering with a freight bill factoring company can help build their business credit. However, it is important to clarify that while factoring companies play a valuable role in providing cash flow solutions for freight brokers, they do not directly contribute to building or improving a broker’s business credit score.
Freight bill factoring is a financial service where a factoring company purchases your accounts receivable (freight invoices) at a discounted rate, providing you with immediate cash. This arrangement can be beneficial for new brokers who need quick access to funds to cover operational expenses and grow their business.
However, it’s important to understand that factoring companies are not extending credit to the broker but rather purchasing the broker’s outstanding invoices. The factoring company assesses the creditworthiness of the broker’s customers or the industry they are in rather than the broker itself. By understanding the distinction between factoring services and credit building, new brokers can take the necessary steps to establish a strong credit profile and enhance their overall financial standing in the transportation industry.
Monitoring and Maintaining Business Credit
Monitoring and maintaining your business credit is key for long-term success. Regularly review your credit reports from major business credit bureaus like the aforementioned TransCredit, Ansonia and Dun & Bradstreet to ensure accuracy and address any errors promptly.
While not all payment information may be reported by carriers, it’s important to maintain a track record of timey payments internally. Keep meticulous records of payment dates, amounts, and the carriers you worked with as some agencies will allow you to self-report this information.
These records can also serve as valuable documentation should there be a negative reporting. Slow or non-payment reports can occur when paperwork was not received in a timely manner, a load was delivered late or damaged, or when a payment was assigned to the wrong account by a factoring company.
Conclusion
Building business credit as a freight broker requires a multifaceted approach. While some carriers may not report payment information to credit bureaus, you can still take steps to ensure your timely payments are documented and contribute to your credit-building efforts. Communication with carriers, including agreement terms that allow for credit reporting and exploring credit reporting services specific to the transportation industry are all valuable strategies. Additionally, utilizing a business credit card that reports payment information and maintaining meticulous payment history internally will help strengthen your credit profile. By adopting these practices, you can build a solid business credit foundation that will benefit your freight brokerage in the long run.
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