Starting Your Freight Brokerage Business
It’s a fantastic time to get into the freight broker business, as several industry trends from the last few years are coming together to make the future look great for the industry.
The entire industry is still adjusting to the huge 750% increase in bond requirements instituted in October 2013 under the Moving Ahead for Progress in the 21st Century Act (MAP-21). This new law has had wide ranging effects, but on the most basic level, MAP-21 increased standards by ensuring that fly-by-night brokers are pushed out of the industry. It’s also helped brokers understand their liabilities in case they fail to fulfill a contract. Of course, we’ll go into more detail about this under the Bonding Section, but what’s important to understand is that new brokers won’t have to deal with competitors who operate under lower standards.
MAP-21 effectively pushed 35% of all US freight brokers out of the industry. These were largely brokers who were unable to comply with the greater bonding amounts, or the fly-by-nighters we just mentioned. So, alongside increasing industry standards, we’re seeing decreased competition. But while this has been the trend for 2014, the advantage won’t continue forever, as brokers adjust to the new industry reality. Thus, it’s clearly better to enter the freight broker industry sooner rather than later.
Improving Economic Conditions
Current forecasts predict solid 3% GDP growth for 2015. The high level of integration which shipping enjoys within the larger US economy means that this trend is sure to benefit freight brokers as well. If you can couple this with starting your business in a high growth area of the country, then you’ll be positioning yourself well!
New software promises to make the process of finding the right carrier for your client’s freight easier and easier. With hundreds of options out there and new ones entering the market regularly, you’re sure to have ample opportunities to keep your business running efficiently. Combine this with the declining costs of the most basic tools of the trade, like computers, and it’s clear that technology is another reason to enter the freight brokerage industry. You’ll find some great software examples in the next section.
How Much Does It Cost to Become a Freight Broker?
If you’re looking to start your own freight brokerage, it’s important to have a clear understanding of all the costs ahead of time. There are two main categories of costs: startup costs and recurring. Here’s a summary…
1. Freight Broker License – $300
The details of this process will be explained later, but this is essentially just a one time fee for obtaining a license from the FMCSA.
2. State Registration and Fees – Varies by State
The process and cost of registering a business is different in each state. But fortunately the federal process is standard and described in the Getting Your MC Authority & Other Legal Requirements section.
3. Equipment – Varies
For a basic freight broker just getting started, a computer, phone, and an internet connection should suffice. As you expand, you can consider renting office space, but there’s no need to factor that into your initial budget, as most freight brokers initially work from home. Annual Costs
4. Freight Broker Surety Bond – $900–$2000
It’s important to note here that this is going to vary depending on your credit score, business financials, and the agency with which you obtain your bond. With JW Surety Bonds, 90% of bonded freight brokers pay less than $2000 a year.
5. Software – $600–$1,200
There’s a huge variety of software available (100+ just in 2015) and new market products are constantly arriving. Some of the most popular options include:
• Brokerware: This software from 3PL Systems includes all of the major features you would expect (customer and sales portals, accounting integration, truckload management systems, etc.) in addition to innovational XML software, which streamlines the process of determining the least expensive and most reliable carrier for a particular piece of freight.
• Tailwind Express: Tailwind offers several software packages designed for freight brokerages of varying sizes. Their basic Express package is specifically created for brokers just getting started and combines affordability with a good set of basic features and solid functionality.
• Load Pilot: One of the most affordable and powerful options out there, Load Pilot has many high-end features like advanced encryption, universal access, international shipping functionality, and access to their database of shippers and carriers.
6. Insurance – $3,000+
Like any business, you need insurance to control legal liability. Freight brokers can be sued for fatalities or injuries from a third party carrier, for not following legal contracts or for employment disputes. For more details about getting your brokerage insured, check out the Insurance section.
7. Marketing – Varies
There are a lot of potential marketing strategies out there from simple cold calling to complex online content marketing campaigns. These have widely varying costs. If you’re starting off with personal contacts to get your business off on the right foot, you might save a bit of money here. But if you’re really starting from scratch, it would be best to budget for some serious marketing. For more detail, check out the Marketing section.
8. Extra for Unexpected Costs – Varies
This is really up to you. Ideally, you’ll want to keep a reserve, so you’ll be prepared for unexpected costs like having to replace equipment, which might suddenly break, or handling payment issues from a shipper. Keep in mind that early cashflow problems are a classic small business killer.
Making a Freight Brokerage Business Plan
This is an essential early step of any business and can’t be neglected. There are many ways to get started. The Small Business Administration (SBA) has a useful online business plan tool, which you can use. But there are some specifics to freight brokerages in particular that you should keep in mind.
Step #1: Choosing the Right Legal Framework
The first step of a business plan is to decide what type of legal structure will work best for you. Then, you’ll need to work through the legal process of founding your company. Legalzoom offers some excellent and inexpensive assistance in this process. As for the type of company, your main options are:
Limited Liability Corporation
Limited liability is exactly what it sounds like — it has the advantage of avoiding personal liability on the part of the owners for any debts incurred by the company. It’s also easy to raise funds by selling new membership interests with this type of structure. For the other advantages of an LLC, check out Legalzoom’s excellent summary.
When two people decide to form a company together, this is the simplest way to do it. A partnership can take many forms, but it always has certain advantages and disadvantages you should consider in terms of liability, flexibility, and longevity.
This is essentially a company which consists of a single individual and would be a great option for someone looking to start a smaller freight brokerage on their own. However, a sole proprietorship does involve putting all of your eggs into one basket, so to speak. Thus, be sure to consider liability issues involved with this business structure.
Corporation (S or C)
Corporations are more complex and difficult to set up, but they offer serious tax and legal advantages if you’re looking to build a larger freight brokerage business. The biggest difference between S and C corporations is that C corporations pay taxes as a corporation and as individual shareholders, while with the S type taxes are only paid by the shareholders. But unless you’re looking to sell shares and employ more than around 20 people, you can probably stick with a simpler business type.
Step #2: Incorporating Technology
Technology is a critical part of any modern freight brokerage business. It’s not only crucial to choose the best brokering software for your needs, but it’s also important to take advantage of standard business tech to streamline your work. That includes having a smartphone, so you can keep up with developments on-the-go, and using accounts and billing software to simplify your life at tax time. Plus, by using the latest applications to more efficiently match freight with carriers, you’ll be a step ahead from the start.
Step #3: Choosing a Location
While brokering freight can be done remotely, face-to-face meetings and personal contacts can really make a big difference. It’s important to think strategically about where economic growth is highest so you can position your business to benefit from the increased freight shipments which accompany your main location.
Step #4: Finding a Niche
Beyond positioning yourself in a great location, finding a market niche can help boost your business’s natural potential for growth and success. For example, by finding an area where a lot of commercial retail development is about to begin you can build contacts early and become the go-to broker for all new businesses as they open their doors and require regular product shipments.
Step #5: Funding your Business
While starting a freight broker business is quite affordable, compared to many other types of companies, it’s still important to understand the licensing fees, application fees, etc. Therefore, the question of funding needs to be incorporated into your business plan from the start. Fortunately, there are many new companies like Lendio dedicated solely to finding peer-to-peer lending options, so keep in mind you have options beyond a traditional bank loan.