Freight Brokerage Business. The Staff of Entrepreneur Media, Inc.
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bills be paid within seven days; today, since deregulation, that is negotiable. But carriers operate on very narrow margins and pay most of their expenses on a given load before they ever pick up the load, 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, and while that would be a safe approach for the broker, you won’t find carriers very enthusiastic about it.
“Carriers take the stand that the reason they are 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 Cherry Hill, New Jersey-based 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. The carriers are saying, ‘You handle the credit for your customer base and you pay me whether you get paid or not.’ It just keeps it simpler and cleaner.”
Tucker notes that there may be times, such as with high-volume shippers or a special seasonal situation, when the billing can escalate rapidly, and the broker and carrier agree to share the financial risk. But those types of contract clauses are the exceptions. Tucker explained, “I would say that in 99 percent of the transactions, the broker does the collections and pays the trucker every penny owed.”
Solid banking relationships are critical for brokers. Andrews says it’s not unusual for a new broker to need a line of credit in the range of $250,000 to $500,000 in order to be able to pay carriers before being paid by the shippers.
“If you don’t pay the trucks in a timely fashion, they won’t haul your freight. If you have nobody to haul your freight, you have no business,” he says. “Other than getting your licensing and insurance, setting up with a good banker should probably be at the top of your to-do list.”
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. “You have to know your banker really well. Go in with a business plan. It also helps if you have been doing business with that bank and they already know you,” said Andrews. “You have to have an excellent credit record, because—as a broker—you have no assets for them to come after.”
• Start Me Up
The following table will give you an idea of the necessary startup expenses for a freight brokerage business. 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 paying carriers before you are paid by shippers.
Keep in mind, there are also licensing fees that new freight brokerage companies need to pay upfront. You can, however, forego most of these upfront costs by becoming an agent who works for a freight brokerage company.
Put together a package that clearly demonstrates to the bank that you are not a credit risk, so they can easily see how they’ll benefit by establishing a line of credit for your business.
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 with one bank and that bank gets sold, you could find your line of credit getting canceled through no fault of your own. 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. Protect yourself by making sure you always have a financial backup to turn to.
Certainly you need strong relationships with your carriers and bankers, but the most essential outside element of your business is your customer base—the shippers. Though you’ll do a certain amount of cold calling as you market your business, hopefully most of your customers will come through referrals, contacts, and networking. You can use your network to get in the door, but remember, this is about business, not just about friendship. “Just because you know someone doesn’t mean they are going to give you the business if your pricing isn’t competitive,” says Andrews.
Of course, there’s more involved than just pricing. Communication is essential. Let customers (shippers) know what’s happening with their shipments every step of the way. Andrews says this means almost-daily contact. Shippers need the comfort of knowing when their freight is moving as scheduled and the opportunity to react appropriately if it isn’t. Most shippers can deal with mechanical, weather, or traffic delays as long as they know about them. Don’t let them find out from their customers that shipments weren’t delivered as scheduled; let them know ahead of time that, for whatever reason, the truck isn’t going to make it, and when they can expect delivery.
The Code of Federal Regulations is very specific about what types of records you must maintain. While you may keep a master list of shippers and carriers to avoid repeating the information, you are 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 (see the Glossary) 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 non-brokerage 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
warning
Even though your contract will prohibit it, you may occasionally work with a carrier that will approach your client directly. This is bad business, and it’s likely that a carrier operating with such a lack of integrity won’t be in business long. Nonetheless, be aware that it can happen, and if you find out about it, be prepared to take the appropriate legal steps, including cease and desist orders and suing for lost revenue.
Industry-specific software, such as what’s available from DAT Solutions, LLC (www.dat.com/resources/product-sheets/dat-keypoint-core-features), can help you organize, manage information, and automate some tasks associated with being a freight broker. Using specialized software will help you become far more efficient than if you rely on spreadsheets and documents created using Microsoft Office applications, for example.
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.
See Figure 2–1 on page 27 for a list of the key elements of a successful freight brokerage business.
• Be Careful What You Say
There may be situations when you’re with other