So, how does one start a freight brokerage business? What does a freight broker do? Get the answers to those questions (and many more) by reading this guide to starting your very own freight broker company.
Becoming a Freight Broker
The trucking industry is massive. As the American Trucking Associations puts it, it is the lifeblood of the American economy—more than 70% of all freight tonnage in the United States is hauled by trucks, and altogether, the industry employs more than 3.5 million drivers and rakes in $726.4 billion in revenue. There is a lot of money to be had in the trucking industry.
The profit potential is not lost on many, and each day, there are entrepreneurs looking to gain a foothold in the trucking industry. There are a lot of different trades and niches to occupy within the world of trucking, from driver to smartphone app designer. The trucking industry operates within a complex network of supply chains and organizations. Savvy business people, in their market research, are oftentimes attracted to the logistical side of the industry and try their hand at starting their own freight brokerage.
What does a Freight Broker do?
A freight broker serves as an intermediary between a shipper and truck driver/trucking company that is looking for freight to haul.
Think of a freight broker as a match.com for the trucking industry—they are matchmakers for truckers that need runs to make and companies/individuals that have freight they need to be moved.
Freight brokers play a crucial role in the shipping process. Brokers negotiate appropriate shipping rates between the two parties concerned and also find work for truckers/carriers. Moreover, freight brokers are expected to be prudent bookkeepers, as they track pickups, deliveries and other stages of the transportation process. It is furthermore commonplace for freight brokers to pay carriers for the loads that they haul (so that the trucking companies can get paid quickly) and then to later collect the payments directly from the shipping party involved.
Let’s take a quick look at the freight brokering process, in a nutshell:
- A shipper, otherwise called a consignor, contacts a broker with a load that needs transported.
- The freight broker checks their connections in the trucking industry and finds a carrier that is willing to transport the load.
- The broker then issues a contract to the carrier—note that if the broker has never before worked with said carrier, a carrier/broker agreement will have to be drawn up.
- The carrier assigns a driver and a truck.
- The driver confirms to the broker that the load has been picked up.
- The driver delivers the load and alerts the broker that the job is finished.
- The carrier sends the broker an invoice for the service.
- The broker pays the carrier’s invoice.
- The broker issues an invoice to the shipper and collects payments.
- The process repeats.
Finding a Niche
Finding a niche role within your industry is a good practice, regardless of what it is your business does. This is true of freight brokering, too—most small brokerage firms choose to design their business model in such a way that their company focuses on particular regions, types of freight, types of carriers, etc. Fixate on what you know well. If you are familiar with the supply chain in Minnesota, for instance, focus your efforts on brokering deals between carriers/shippers in Minnesota; if you prefer working in local-logistics, focus on inter-city shipments; if you prefer working with a certain type of freight or a certain type of industry, then seek them out.
After you get an idea for what type of shipping with which you’d like to become involved, it’s time to hit the books and do some market research. Take a look at the economy and the facts and figures surrounding your potential industry—if you deem that there is sufficient demand for the services you would provide, start looking ahead to the next step. If you don’t know that you could squeeze a profit from your incoming freight brokerage, rethink your niche and try again.
The second component of market research for entering the freight brokering industry is understanding how to price shipments. The cost of moving freight is determined by two aspects of the load—its weight and the distance to be traveled. Get yourself familiar with the going rates of freight and also keep in mind that you should keep 5-10% of that total for yourself as a broker’s commission.
How to Find Customers for a Freight Brokerage
Once you have devised a role for yourself in the transportation industry and you’ve done the research that gives you the confidence to move forward, it is time to start looking for shippers and carriers to connect. But where are they to be found?
Finding carriers is not as difficult as you might think. There are specific trade magazines and trucking directories out there that can help you get started. You can also hang around truck stops—Ameen Khwaja, a guest writer for Entrepreneur and freight brokering expert, recommends targeting those that drive the largest, nicest trucks.
One could also try and find carriers by word of mouth recruitment—typically, freight brokers enter the brokerage business after some years in the transportation industry, as either a shipper or a carrier themselves. Call upon your previous business contacts and use the (hopefully) strong reputation you’ve built for yourself within the world of freight transportation.
The Logistics of Starting a Freight Brokerage
How to start a freight brokerage
- Determining a Legal Structure for a Freight Broker Company
You will have to come up with a legal structure for your freight brokerage, just as every other entrepreneur must do with a startup company. The following are the aptest legal classifications for freight brokerages:
Corporation— only shoot for a corporation status if you plan on setting up a large enterprise. A corporation is, per the SBA, an independent legal entity owned by shareholders in which the corporation itself (and not the shareholders) are liable for the business’s debts and commercial actions. Setting up a corporation is complex, but for organizations of an appropriate size, it ensures limited liability for the owners/shareholders.
Partnership— a partnership, just as the name implies, is a business owned and directed by more than one person. Depending on the nature of you and your partners’ business relationship, you can register as either a general partnership, limited partnership or joint venture. If you do intend to have a business partner(s) throughout the process, forming a partnership is a sensible move, as it simplifies the tax filing process.
Sole Proprietorship— This is the ideal setup for someone who intends to “go it alone” and start a small freight brokerage. It is easily the most simple of these legal structures—as the SBA explains, it is an unincorporated business that is owned and run by a single individual, in which there is no distinction between the individual and the company in the eyes of the government.
Limited Liability Corporation (LLC)—most small businesses in the United States opt for LLC status. According to the Small Business Administration, a limited liability company offers entrepreneurs a cross between a corporation status and partnership status; it provides the limited liability features of a corporation and also the tax efficiencies of a partnership. LLC’s are not taxed as business entities. Rather, as is done in a partnership, the owner’s personal income is taxed.
- Register with the Federal Motor Carrier Safety Administration (FMCSA)
Another logistical operation that you’ll have to carry out is obtaining an MC Authority from the FMCSA. In order to legally run your brokerage, you will need a motor carrier (MC) number, and it takes a bit of time to obtain (a few weeks or so). The process goes as follows:
Get a PIN from the FMCSA—to do this, all you have to do is visit their website and fill out some forms.
Submit an online OP-1 application. This will cost you $300 and is non-refundable, so check your application carefully for mistakes. Keep in mind that you’ll have to check in biennial updates on your MC registration as you operate your brokerage.
- Obtain Insurance (if you plan on working as a carrier/freight forwarder, too)
So, when deciding to purchase an insurance policy or not, it is worth noting that if you intend to only work as a freight broker, you needn’t have an insurance policy. Nonetheless, if you decide to work as a carrier or expand into other roles within the trucking industry, you will need liability insurance, in which case you should consult a company that issues you a surety bond (more on that later) or the FMCSA.
- Secure Processing Agents
Legally speaking, you must have a processing agent resident in each of the states in which you intend to work, have an office or administer contracts. Basically, you have to have a corporeal presence in each state simply in case somebody files a claim against your transportation brokerage. There are for-hire companies that will issue processing agents where you require them, but there are also some firms that will do it for free. Once you have secured your processing agents, you’ll have to submit a BOC-3 form to the FMCSA and to the governments of each state in which you plan to operate
- Get Funding and Secure your UCR
The final step in setting up the legal framework for your transportation brokerage is to obtain financing and a Unified Carrier Registration (UCR).
The two processes go hand-in-hand. Legally speaking, you must have a bond of trust totaling $75,000 before beginning operations as a freight broker so that you can guarantee that your shippers are paid. To secure this financing, you can apply for either a BMC-84 Bond or BMC-85 Trust Fund.
Once you have made your selection and have secured your funding, you can apply for your UCR. The UCR is a system that collects fees from and registers drivers involved in interstate transportation, and it costs $76. Keep in mind that the UCR program does not apply in the following states: Vermont, New Jersey, Florida, Maryland, Oregon, Wyoming Arizona and Nevada; if you intend to operate in any of those aforementioned states, you will have to complete a separate, state-specific registration process.
Freight Broker Startup Costs
So how much will it cost to register your freight brokerage and set up shop?
As with any entrepreneurial venture, there is no way to determine startup expenses precisely.
Khwaja proffers a suggested startup fund ranging anywhere from $5,000 to $250,000, depending on the size of the outfit you’re trying to establish. Obviously, there is a huge disparity between $5,000 and $250,000. Some expenses, you will find, are more or fewer luxuries—if you have very limited startup capital, you may forego leasing office space and elect to set up shop in your basement, for instance.
So what can you expect to spend money on? Per the advice of Khwaja and others, you can anticipate the following expenses:
- Rent (if necessary)
- Equipment—somewhere between $6,000 and $20,000
- Advertising (if necessary)
- Phone/Internet—between $100 and $300
- Payroll (if necessary)
- Office Supplies—expect to spend a few hundred dollars on:
- A reliable computer
- Accounting and word processing software
- Postage Scale and Meter
- General paper products, staplers, pens, pencils, etc.
- Insurance—typically upwards of $700 for the first quarter of operation
- Freight Broker License fee—a one-time $300 charge to register with the FMCSA
- UCR Registration—a one-time cost of $76
Again, starting a small brokerage does not have to be an expensive undertaking, particularly if you have pre-established connections in the trucking industry.
Nonetheless, you will need some significant sums (tens-of-thousands of dollars) to set aside for operating capital. The best way to establish a loyal clientele of carriers is to pay them quickly for the freight that they haul. If you wait to pay the carriers until the shippers put up the cash. Then you will not maintain carriers for long—they will go elsewhere and work with brokers that can provide them with steady cash flow. Advance payments to carriers keep trucking company owners happy. It also attracts new clients and ultimately will ensure that your brokerage doesn’t falter at the onset.
Keep in mind that it is immensely helpful to have a solid credit score as you start your freight brokerage. Odds are you will need to borrow some money for the operating funds (unless you have $50,000 or so just sitting around). In order to plead a good case to a bank or a lender, you will need a comprehensive business plan to show to the financial agents and you will need a reliable credit history.
Launching Your Brokerage
After doing market research, finding a niche role in the transportation industry, establishing a list of client carriers and projecting your startup costs, you are ready to pull the trigger and register your freight brokering company.
If you stick to these guidelines, you should create a healthy freight brokerage. However, even healthy freight brokers struggle to maintain consistent cash flow. If your freight brokerage falls short on working capital to continue paying its carriers, get in touch with Factor Finders. We have connections that can help you secure debt-free financing that will help you match more carriers with more shippers. Never let your brokerage fall behind because you run of out liquid cash.