How to Start a Freight Brokerage Business
Editor's note: This article was excerpted from our Freight Brokerage Business start-up guide, available from Entrepreneur Bookstore.
Take a look around your home or office. It's highly unlikely you have much--if anything at all--that didn't reach you either entirely or partially by truck. The size and scope of the motor freight industry is almost overwhelming. The good news is, there's still plenty of room for you to start and grow a profitable business serving the industry as a freight broker.
What exactly is a freight broker? Very simply, it's an individual or a company that brings together a shipper that needs to transport goods with an authorized motor carrier that wants to provide the service.
A freight broker falls into the category of transportation intermediary, which is a company that is neither a shipper nor an asset-owning carrier, but plays a role in the movement of cargo. "Transportation intermediaries leverage their knowledge, investment in technology and people resources to help both the shipper and carrier succeed," says Robert A. Voltmann, executive director and CEO of the Transportation Intermediaries Association.
Brokers provide an important and valuable service to both motor carriers and shippers. They help carriers fill the trucks and earn a commission for their efforts. They help shippers find reliable motor carriers that they (the shippers) might not have otherwise known about. In fact, some companies use brokers as their traffic department, allowing the broker to coordinate all their shipping needs.
Brokers aren't new to the trucking industry; they've been around since the industry itself began in the early part of the 20th century. Prior to the 1970s, however, regulations governing brokers were so restrictive that few firms were willing to even try to gain entry into the industry. But with dramatic changes in federal transportation policy during the 1970s, regulatory restrictions have eased, creating new entrepreneurial opportunities in the third-party logistics arena.
An industry so huge and diverse requires a wide range of participants to thrive. Some of these participants' titles may be a bit confusing, and some of their responsibilities may overlap. But to keep things as clear and simple as possible, let's look at who the key players are and what they do.
- Freight broker. A freight broker is the middleman who connects shippers and carriers.
- Shipper. A shipper is an individual or business that has products or goods to transport.
- Motor carrier. A motor carrier is a company that provides truck transportation. There are two types of motor carriers: private (a company that provides truck transportation of its own cargo) and for hire (a company that is paid to provide truck transportation of cargo belonging to others).
- Freight forwarder. Often confused with freight brokers, freight forwarders are significantly different. Forwarders typically take possession of the goods, consolidate numerous smaller shipments into one large shipment, then arrange for transport of that larger shipment using various shipping methods, including land, air and water carriers.
- Import-export broker. These people are facilitators for importers and exporters. Import-export brokers interface with U.S. Customs, other government agencies, international carriers, and other companies and organizations that are involved in international freight transportation.
- Agricultural truck broker. Generally small and operating in one area of the country, unregulated agricultural truck brokers arrange motor carrier service for exempt agricultural products.
- Shipper's associations. Shipper's associations are exempt, nonprofit, cooperative organizations formed by shippers to reduce transportation costs by pooling shipments. Shipper's associations operate in a manner very similar to that of freight forwarders, but their service is limited to their members and is not available to the general public.
In a perfect world, of course, each entity in the industry would handle its traditional role and that's all. However, the transportation industry is changing so rapidly that once-distinctive lines are blurring. Also, it's quite common for a successful freight broker to expand his or her business by creating subsidiaries or additional companies that offer other freight services.
Education And Experience
The brokers we spoke with recommended working in the industry--either for a shipper, a carrier or both--before starting your own brokerage. You'll not only gain technical expertise, but you'll make contacts that are critical to success in this business.
Some brokers may opt to use agents to develop a wider scope of operations. In this context, agents are independent contractors who represent a freight broker in a given area. This would enable you to offer a local presence when you might not have the volume to justify opening your own office.
Along these lines, you may want to consider starting out as an agent rather than a broker. Chuck A.'s company is based in Indianapolis, but he has agents in Florida, Georgia, Indiana, Texas and West Virginia. Because his agents aren't brokers and because they're homebased, their start-up materials are minimal and typically consist of a computer, telephone and fax machine. An agent's work is very similar to what a broker does, but the agent functions under the auspices of the broker and the broker is the one responsible for such issues as paying carriers and maintaining the required surety bond.
Choosing a Niche
There are many valid reasons for choosing a well-defined market niche. By targeting a specific market segment, you can tailor your service package and marketing efforts to meet that segment's needs. You'll also develop a reputation for expertise that attracts new customers.
You can design your niche based on geography (either the location of the shippers or the destination of the freight), types of cargo (agricultural, perishable, oversized, bulk commodities, etc.), size of loads, specific industries or some other special shipping need.
To choose a niche, first consider what types of shipments and/or shippers you'd enjoy working with. You may opt to simply handle general commodity freight-materials that are typically easy to handle and don't require any special attention. Or you may want to develop some expertise in areas such as heavy equipment, oversized loads, perishable commodities or even hazardous materials.
Don't limit your specialization plan to the commonly accepted areas; instead, find your own niche. Bill T., for example, does some interesting work for retailers. One major national chain hires his company to handle the distribution of point-of-sale promotion displays that have to be delivered to hundreds of stores on the same day. Other big businesses use Bill's company to manage shipments related to store openings and closings.
Your next step is to conduct market research to determine if there's a sufficient demand for the services you want to provide. If there is, move ahead with your marketing plan. If there isn't, consider how you might adjust your niche to one that generates adequate revenue.
There are tens of thousands of carriers operating in the United States. Your job as a broker is to identify the ones that provide the services your customers need and to confirm their reliability before using them.
You'll find carriers listed in a number of directories and trade magazines. Word-of-mouth is also a good way to find carriers; as you're out there networking, pay attention to what others are saying about particular trucking companies, and follow up on good reports.
You can also look for trucks at truck stops and on the road. When you see trucks that are clean and well-maintained, speak to the driver and find out something about the company. If it isn't practical to speak to the driver, make a note of the company name and headquarters location (it will be posted on the truck or the cab), and give the company a call.
The following list will give you an idea of the necessary startup expenses for a freight brokerage. Where your operation falls within the ranges depends on whether you start as a homebased business or in a commercial location, and whether you hire employees right away or do everything yourself in the beginning. The suggested operating capital should be enough to cover the first three months of operation and must be sufficient to cover what it will cost to pay the carriers before the shippers pay you.
Licenses/tax deposits: $200-$400
Professional services: $200-$750
Insurance (first quarter): $700-$1,400
Suggested operating capital: $5,000-$250,000 (cash or line of credit)
Basic Office Equipment
As tempting as it may be to fill up your office with an abundance of clever gadgets designed to make your working life easier and more fun, you're better off buying only what you need at first. Consider these basic items:
- Typewriter - for filling out pre-printed and mutlipart forms
- Computer and printer
- Software - including accounting, customer information management and other administrative programs, and programs designed specifically for freight brokers
- Copy machine
- Fax machine
- Postage scale
- Postage meter
- Paper shredder
- Telecommunications equipment - including a telephone, voice mail, cell phone, pager, toll-free number and e-mail
Banking On Your Banker
Solid banking relationships are critical for brokers. Chuck A. says it's not unusual for a new broker to need a line of credit in the range of $250,000 to $300,000 to be able to pay carriers before being paid by the shippers. "If you don't pay the trucks in a timely fashion, they won't haul your freight. If you have nobody to haul your freight, you have no business," Chuck says. "Other than getting your licensing and insurance, setting up [a relationship] with a good banker is probably at the top of the list."
Of course, you don't want to walk empty-handed into a bank you've never done business with and ask for a major line of credit. "You have to know your banker really well. Go in with a business plan. It also helps if you have been doing business with that bank and they know you," Chuck says. "You have to have an excellent credit record, because [as a broker,] you have no assets for them to come after."
Put together a package that clearly demonstrates to the bank that you're not a credit risk and that they'll benefit by establishing a line of credit for you.
The basic concept of freight brokering is pretty simple: A shipper (or consignor, as they're sometimes referred to) calls you with a load. You complete your own internal paperwork and check with your carriers to see who has a vehicle available. If you already have a relationship with a carrier, you fax it an addendum to your basic contract that describes this particular load and the rate. If the carrier agrees, the company's representative signs the document and faxes it back. (If you don't already have a relationship with the carrier, you'll need to set up a carrier/broker agreement before you finalize the deal on the first shipment.)
Next, the carrier dispatches the driver. It's a good idea to require that the driver call you to confirm that the load has been picked up and again when it's been delivered.
After the shipment has been delivered, the carrier will send you an invoice and the original bill of lading. You invoice your customer (the shipper), pay the trucker and then, ideally, do the whole thing again with another shipment.
The Code of Federal Regulations is very specific about what types of records you must maintain. While you may keep a master list of shippers and carriers to avoid repeating the information, you're required to keep a record of each transaction. That record must show:
- the name and address of the consignor (shipper);
- the name, address and registration number of the originating motor carrier;
- the bill of lading or freight bill number;
- the amount of compensation received by the broker for the brokerage service performed and the name of the payer;
- a description of any nonbrokerage service performed in connection with each shipment or other activity, the amount of compensation received for the service, and the name of the payer; and
- the amount of any freight charges collected by the broker and the date of payment to the carrier.
You must keep these records for a period of three years, and each party to a particular transaction has a right to review the records relating to that transaction.
One of the most appealing aspects of a freight brokerage business is that your physical startup requirements are relatively small. Unlike a carrier or freight forwarder, you don't need a warehouse or loading dock. Your customers aren't likely to come to your location, so you don't need to worry about an impressive reception area or elegant offices. In fact, while there are some definite advantages to a commercial location, a freight brokerage is an ideal business to start and run from home.
Where you operate depends on your resources and goals for your company. Many brokers start from home with the goal of moving into commercial space as soon as they're established with a few clients, an excellent strategy.
The major benefit of starting a homebased business is the fact that it significantly reduces the amount of startup and initial operating capital you'll need. But there's more to consider than simply the upfront cash you'll need. Do you have a separate room for an office, or will you have to work at the dining room table? Can you set up a comfortable workstation with all the tools and equipment you'll need? Can you separate your work area from the rest of the house so you can have privacy when you're working--and get away from "the office" when you're not?
By contrast, starting in a commercial location requires more initial cash than starting from home. If you decide to do this, your range of options is fairly broad, and your choice should be guided largely by the goals you've set for your business in terms of market and growth. Consider office buildings, light industrial parks and executive suites.
Unless you have an extremely large home, you'll find that a commercial location allows you to create a setup that's more efficient and practical than what you might be able to do in a spare bedroom.
Income & Pricing
Freight charges are based on a number of variables, but the two main factors are the weight of the load and the distance it must travel. Rates are also affected by the type of truck needed, whether the driver needs to make one or more stops to pick up the freight, and whether the driver needs to make more than one stop to deliver the goods. Each shipment is entitled to one pickup and one delivery with no extra charge; you can usually negotiate the rate for additional stops with the carrier.
Before you begin shopping for rates for specific shipments, get an idea of the current "going rates" for the types of shipments you're likely to be handling. You can do this by requesting copies of tariffs from several carriers and studying them.
Your income is generated by the commissions you earn on each load. You'll be paid one of two ways: You can bill the shipper the amount you're going to pay the carrier plus the amount of your commission, or the carrier can bill the shipper directly and then pay you a commission from its revenue. The most common way to handle billing and commissions is to have the carrier bill you and then you bill your customers.
Your commission is negotiable, and you can get whatever the traffic will bear. The average broker's commission is between 5 and 11 percent of the shipping charges, sometimes higher. Keep in mind that your commission is your gross revenue, and out of that you must pay your overhead: rent, taxes, payroll, sales commissions, utilities, debts and so on. Ron W. estimates that most brokers are lucky to earn a net profit of 1 to 2 percent after expenses.
Marketing and Resources
Just about everything must move at least part of the way to its final destination by truck. With that in mind, it's safe to say that almost every company is a potential customer for you. But if you take that approach, you'll have a tough time coming up with an effective, not to mention affordable, marketing plan.
What's wrong with just going after anybody in the world who might ever have to ship something by truck for any reason? Because that market segment includes literally millions of companies and individuals, and it's impossible for any small business to communicate effectively with a market that size. Can you afford to send even one piece of direct mail to 1 million prospective customers? Of course not. But when you narrow that market down to, for example, 500 or 1,000 customers in a particular area, doing a successful direct-mail campaign is much more affordable and manageable.
Keep these questions in mind as you form your marketing plan:
- Who are your potential customers?
- How many of them are there?
- Where are they located?
- How do they currently transport freight?
- Can you offer them anything they aren't getting now?
- How can you persuade them to do business with you?
- Exactly what services do you offer?
- How do you compare with your competitors?
- What kind of image do you want to project?
Associations and Regulatory Agencies
- American Society of Transportation & Logistics
- Delta Nu Alpha, an international transportation organization with a focus on education
- Federal Highway Administration
- National Industrial Transportation League
- National Association of Small Trucking Companies
- Surface Transportation Board
- Transportation Clubs International, a network of more than 200 local transportation organizations
- Transportation Intermediaries Association, an organization for North American transportation intermediaries, including property (freight) brokers, domestic freight forwarders, consolidators, ocean and air forwarders, intermodal marketing companies, perishable commodity brokers, logistics management firms, and motor carriers
- U.S. Department of Transportation