How to Start a Freight Brokerage Business
February 22, 2001
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-$400Source: www.entrepreneur.com