Freight Brokerage Business. The Staff of Entrepreneur Media, Inc.
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Annual revenue from trucking each year is around $700 billion—more than 80 percent of total revenue earned by all domestic transport modes.
Your income is generated by the commissions you earn on each load. You’ll be paid one of two ways: You can bill the shipper the amount you are going to pay the carrier plus the amount of your commission, or the carrier can bill the shipper directly and then pay you a commission from its revenue.
The most common way to handle billing and commissions is to have the carrier bill you, and then you bill your customers (the shippers). Cherry Hill, New Jersey-based freight broker Bill Tucker says this is much easier and less confusing for your customers than if they are billed directly by the carrier.
• Know Your Limits
As a broker, by law you may not charge or receive compensation from a motor carrier for brokerage service if you own or have a material interest in the shipment. You are also not able to exercise control over the shipment because you own the shipper, the shipper owns your company, or there is a common ownership of the two.
In addition, you may not give or offer to give anything of value to any shipper or consignee (or their officers or employees) other than inexpensive advertising items that are distributed for promotional purposes.
If the carrier bills your customer directly, your customers will receive multiple styles of bills on a variety of billing cycles, and they will have to do the extra work of matching up the bill to the shipment. “When their computer generates a bill of lading for the broker and the carrier bills them, it gets confusing,” Tucker says. “Nowadays, almost all freight brokers bill the shipper and pay the carrier. It’s much simpler for the shipper.”
As a freight broker, your commission is negotiable. You can get whatever the traffic will bear. The average broker’s commission is between 8 and 15 percent of the shipping charges, sometimes higher, and a new broker can typically expect to earn between 8 and 10 percent.
“It all comes down to negotiating,” says Indianapolis-based freight broker Chuck Andrews. “If you’re in a highly competitive market area—like in Atlanta, where there is a lot of freight and not very many trucks—your commission will be much lower than the industry average.”
Keep in mind that your commission is your gross revenue, and out of that you must pay your overhead: rent, taxes, payroll, sales commissions, utilities, debts, etc. Williamson estimates that most brokers are lucky to earn a net profit of one to two percent after expenses.
Although you, your carriers, and your shippers need to agree on the total freight expenses for shipments, the prices of transporting freight can be broken down into smaller units. Those numbers are used to help carriers measure their own profitability and by shippers to set prices of their goods and determine profit levels. For example, carriers are interested in the total fee for any given trip, and they also want to know their fee per mile. Shippers are often interested in the cost by weight, typically measured in 100-pound units and referred to as “cost per hundredweight” (abbreviated “cwt”). These numbers are easy to calculate with simple arithmetic.
To quote a rate for a customer, follow these ten steps:
1. Find out the point of origin.
2. Find out the destination.
3. Determine the gross weight of the load.
4. Ask if the carrier will need to make stop-offs or split pickups.
5. Check whether pallets are required.
6. Find out when the load(s) will be ready for pickup.
7. Find out when the load(s) can be/need to be delivered.
8. Ask if appointments are necessary at origin or destination.
9. Find out who gets billed for the freight charges.
10. Obtain the frequency and number of similar shipments.
• Profit Prophet
When someone is considering starting a business, often one of his or her first questions is: “How soon will I start making money?” What they really mean is: “How soon will I start making a profit?” For a freight brokerage, the answer to that question is “It depends.”
You’ll start generating revenue with your first shipment. How long you take to actually begin making a profit will depend on the size of your operation, your monthly overhead expenses, how many customers you had when you opened your doors, and the thoroughness and aggressiveness of your business plan. Indianapolis-based freight broker Chuck Andrews says that if you have shippers lined up from the beginning and you’re aggressive, you could be profitable within 90 days. But if you only have a few customers and aren’t able to move a lot of freight, it could take a year or more.
With this information, you’ll be able to contact carriers for quotes that will be accurate. Few things are more frustrating in this business than to quote a rate based on incomplete information. A quote will be impacted if the customer needs extra services that you have to charge for. If you didn’t calculate these fees into your initial quote, then you have to tell the client that their final bill will be higher than your original estimate. Needless to say, customers don’t like this, and you could lose future business as a result. Once you quote a price, your clients will expect you to adhere to it.
Once you match a load with a carrier, you must fill out a number of forms. This is something you can do manually, or utilizing specialized software can help you streamline the process.
First, you and the carrier need to enter into an agreement covering current and future dealings. The Transportation Intermediaries Association provides sample agreements in its New Broker Kit (www.tianet.org/TIAnetOrg/Meetings/Event_Display_TIACon.aspx?EventKey=NBK), but the freight brokers we talked with recommended that you develop your own contracts, agreements, and forms, customizing them to your particular operation. To do this, you’ll need to consult with an attorney who specializes in this industry.
Once you have a carrier agreement on file, you need to send the carrier a load confirmation and rate agreement form for each specific load. When the carrier picks up the load from the shipper, the shipper will give the carrier a bill of lading listing the goods being transported and any special arrangements the driver needs to make for the load. When the driver reaches the consignee (recipient of the shipment), he needs to have someone there sign for the load.
If an independent contractor unloads the freight at the consignee’s location, the driver needs to obtain a contract labor receipt from this worker. Depending on your arrangement with the carrier, the driver or trucking company will invoice you, the shipper, or the consignee for transportation services.
The carrier/broker agreement outlines the terms under which you will work with a given carrier. It’s designed to apply to all the dealings you have with a particular carrier and should also provide for any future changes.
When writing the carrier/broker agreement, make sure to do all of the following:
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