How to Start a Freight Brokerage
In some ways, starting a freight brokerage is much easier than starting a trucking or carrier company. Namely, your startup costs are much lower, because you do not need to have a fleet of trucks, or the employees the drive the fleet (even if its a fleet of one).
The physical requirements for starting a freight business are basically a computer, freight brokerage software, a phone, a fax machine and a desk. Having a photocopier, a mail scale, a Fedex account and toll-free number will also be very helpful. Finally, a membership in Transportation Intermediaries Association will be worth every penny of the $120 a year dues.
The easy part of starting a freight company versus a trucking company does not end with the equipment requirements, but the advantages get less dramatic. As a freight broker you will need quite a few permits and licenses, namely a license from Office of Motor Carriers, plus all the usual business licenses for your state or county.
In terms of insurance and cash flow, you will have about the same level of challenges as a freight broker as you would as a trucking company owner. That’s because freight brokers have to pay carriers first, before the shipper pays the freight broker. In other words, for a shipment to happen, the shipper (also known as a consignor) calls the freight broker and requests transport for their cargo. The shipper does not pay at this time. The broker then calls the right transport company (also known as a carrier) and arranges the transport. The freight broker must pay the trucking company before the cargo is transported, or that cargo is going to be left on the dock. Only after the cargo has been delivered will the consignor pay the freight broker.
All this means you, the freight broker, will need to have a considerable credit line. Even small brokerages typically have $250,000 lines of credit. This means your credit score needs to sparkle when you sit down with a banker to secure that line of credit. What’s more, you’ll also need a surety bond just in case anything goes wrong. For a long time, a $10,000 surety bond was enough for a small brokerage, but more and more startup and established freight brokerages are finding they need $100,000 or even $250,000 surety bonds in order to compete with the major freight brokerages.
It would be easy to ignore all those financial hurdles if you’ve heard the commission most freight brokers get on each deal: 10-12%. But you should also know that by the time all the overhead is paid for, that juicy 12% falls to 1-2%. Still, this is a $346 billion a year industry (freight brokerages… not just trucking), so even a fraction of a percent can make for a tidy income.
That factoid about market size brings us around to the idea specializing, or finding a niche within the larger industry. Finding the right niche for your brokerage is probably the single biggest element that will contribute to your success, assuming all the basics are in place, like financials and licenses.
Your startup costs can be kept low if you already have a home office. Then you can skip rent and buying a new computer. You’ll still need freight brokerage software, which may run as much as 10,000 depending how large your operation is. You’ll also need all the basics of a business, like business cards, a small website, office supplies etc. Expect to spend around $500 equiping your office, $1000 for advertising, and another $1000 for licenses and possibly consulting a lawyer about what your business structure will be (sole proprietorship, LLC or incorporated?).
One thing your office will need is good file storage. You have to keep detailed records of all the carriers and consignors you work with, and every transaction you’ve had with them, for 3 years. While you can scan all this paperwork and keep 3 years of papers on one thumb drive, it is prudent to buy a couple of fire-proof file cabinets that will fit backup copies of everything you need to comply with The Code of Federal Regulations.
If starting a freight brokerage seems like too much for you, but you’re still keenly interested in the business, the next best choice after having your own brokerage is to work for an existing brokerage. You can do that as a regular employee, or as an agent.
Working as an agent of a freight brokerage is similar to being an insurance company agent or in some sense working as a franchisee. That’s because you get all their financial benefits (massive credit line and surety bond), their brand recognition and reputation, and most of their contact structure. The freight brokerage will take 35-45% of your cut, but for many people that’s a fair trade for getting rid of all the overhead hassles. And if your credit is poor, it may be the only way you can swing being a freight broker.
If you still want your own brokerage, but think you may be getting in over your head, I highly recommend getting TIA’s New Broker Kit, which will walk you through every step of the process in detail.