Post by Ismail AbdulAzeez on Jun 28, 2017 7:51:26 GMT 1
Supplying businesses with the freight they need is big business. It’s big for an obvious reason: supplying physical goods across a country and between countries is a fundamental aspect of modern commerce. Almost every material thing we consume has been transported through some part of a freight network. The industry includes big freight forwarding companies that own fleets and small to mid-sized freight forwarding companies that provide specialized service for road, air, rail, and sea transport.
When initiating an accelerator startup program of any kind, you can learn a great deal about the challenges of starting a business by doing a comparison study of how startups in another industry overcame apparently insurmountable obstacles. Launching any kind of startup is difficult, but venturing into the freight forwarding business to directly handle customers’ shipments probably numbers among the most challenging. This is because the industry is huge and lucrative, with no sign of slowing down, because the competition is fierce, and because customers can pick and choose which freight forwarding company they want to work with based on quality of work, pricing and extended credit terms.
As a result, customers expect to be able to get 30 or 60 days credit, and in some cases even 90 days credit. This means that they don’t have to pay their invoices after freight has been delivered but are only legally obligated to honor their invoice long after the freight has been delivered. This arrangement puts a tremendous strain on the operations of a small freight forwarding company with inadequate capital. It is in a bind because there is insufficient cash flow to cover overheads – pay drivers, buy fuel, staff offices. Simply asking a bank or an investor for more money is not a solution because it raises debt and just piles on more interest payments.
Fortunately, a small freight forwarding company can manage its overhead through a financing system called factoring. When a factoring company buys accounts receivables at a discounted price from a freight company, it pays the company immediately and then waits to collect the invoice payment from the freight company’s client. It’s a win-win situation for all parties, the freight forwarding company gets the money it needs to manage its overheads, the factoring company makes a modest profit by acting as an intermediate between the freight forwarding company and the client, and the client gets to pay their bill after 30 or 60 days after they have received their freight.
Once the problem of negative cash flow is addressed, running a freight forwarding business is fairly straightforward.
Depending on the size, the type of transportation needed, and the destination of the shipment, different scenarios are possible.
The simplest scenario is transportation within a country. In this scenario, a business will collect goods from a distributor or manufacturer and deliver it to the customer.
A more complex scenario arises in transportation between countries. This usually involves several form of transportation; for example, trucking followed by shipping. In this international scenario, a freight forwarding business might collect manufactured good from a distributor and transport it to a warehouse for storage. The freight forwarding business will then keep on shuttling between the location and the warehouse until there is a sufficiently large consignment to make it economical to deliver everything to the final destination.