Starting a Freight Brokerage Business? 5 Things You Need to Know.
In Start Your Own Freight Brokerage Business, the staff at Entrepreneur Press and writer Jacquelyn Lynn explain how you can get started in the freight brokerage industry, from your first steps to hiring employees, marketing your business and managing your finances. In this edited excerpt, the authors discuss the five essential areas you need to understand before you start a freight brokerage business.
The dissolution of the Interstate Commerce Commission and other aspects of transportation deregulation have left many people confused about what's regulated and what's not. Here's what you need to know about the regulatory and practical requirements of being a freight broker.
1. Legal issues
Freight brokers must register with the Federal Motor Carrier Safety Administration (FMCSA). Essentially, you file an application (form OP-1) and pay a filing fee, obtain a $75,000 surety bond or establish a trust fund, and designate agents for service of legal process. The registration will remain valid as long as these requirements continue to be met.
The surety bond or trust fund is evidence of financial responsibility. This means you must demonstrate you have access to that amount of liquid assets to meet your obligations and pay any potential claims. You can either use your own resources or contract with a bonding company. Evidence of a surety bond must be filed using form BMC 84; evidence of a trust fund with a financial institution must be filed using form BMC 85.
Designation of process agents means that for each state in which you have offices or in which you write contracts, you must file a designation of person on whom court process may be served.
When your application is approved, you’ll receive a permit with an MC number from the FHWA that's your authority to operate as a broker within the United States. Beyond the regulations that govern your particular operation, when you act on behalf of a person bound by law or FHWA regulations as to the transmittal of bills or payments, you must also abide by the laws or regulations that apply to that person.
In addition to federal requirements, you’ll need whatever business licenses and/or operational permits that are required by your local and state governments. Check with your local planning and zoning department or city/county business license department to find out what you need.
2. Get experience
Experienced brokers recommend 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 also make contacts that are critical to success in this business.
Freight broker Cathy Davis entered the industry as an inventory control clerk for a river terminal, then spent time working in sales for motor and air freight carriers. Her consulting business gave her the opportunity to learn even more about being a broker; she was an agent for brokers before becoming one herself, which gave her both hands-on experience and an opportunity to build her reputation.
3. Financial management
It’s important to understand the economics of the trucking business when you negotiate payment terms with your carriers. In the past, ICC regulations dictated that freight bills be paid within seven days; today, since deregulation, that's negotiable. But carriers operate on very narrow margins and pay most of their expenses on a given load before they ever pick it up, so cash flow is as critical to them as it is to the broker.
Some brokers would prefer not to have to pay the carrier until they get paid themselves, but you won’t find carriers very enthusiastic about it. “Carriers take the stand that the reason they're using a broker is so they don’t have to do credit checks on the customers or do the sales and service that we provide,” says freight broker Bill Tucker. “It’s one of the reasons the carriers will sell to you a little lower than they would bill the shipper direct.”
4. Banking on your banker
Solid banking relationships are critical for brokers. 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 truckers in a timely fashion, they won’t haul your freight. If you have nobody to haul your freight, you have no business.
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. Put together a professional package including a complete business plan 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. Be sure to take your package to a commercial loan officer, not someone who handles personal accounts. Get a referral from someone who's a good customer.
In these days of banking mergers and acquisitions, along with personnel turnover, it’s a good idea to have relationships with more than one bank. If you have a single line of credit and the bank gets sold, you could find your line of credit canceled. Or if you have a strong relationship with a loan officer who gets promoted, transferred, or changes jobs, you may find the new loan officer not as receptive to your needs. Make sure you have a financial backup to turn to.
5. Record-keeping requirements
The Code of Federal Regulations is very specific about what types of records you must maintain. 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
- 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.
Correction: This article has been edited to reflect the proper name of the department with which freight brokers must register. Freight brokers must register with the Federal Motor Carrier Safety Administration (FMCSA).