As freight brokers, we are the link between our customers and the transit of their goods. Properly vetting motor carriers is a critical responsibility and we walk you through the steps.
It is often thought by many that starting your own freight brokerage is an easy and lucrative opportunity to succeed in the freight broker industry. While it might seem like a quick way to get started and make a lot of money, there are many things to consider when determining if a starting a freight brokerage truly is the right option for you. I have written pieces in the past that compare the different models of freight brokers and freight brokerages, such as freight agents, W2 employees, and licensed business owners and in this piece I’m going to specifically discuss the licensed freight broker in detail.
We can specifically identify four main considerations that you should explore when deciding if getting your own authority is appropriate, but first let’s differentiate what a licensed broker is, and how it’s different than the other two common models. A licensed freight broker has their own legal authority to broker freight. They do not operate under another entity’s authority like an agent or employee would. Because of this, they must ensure they meet every requirement set forth by the Department of Transportation to legally operate. They are also responsible for all facets of their business such as financial risk and accounting functions. The upside, in many brokers minds, is that they keep 100% of the net profit that their business produces. While that is the case, you must consider turnover, startup costs, back-office tasks, and risk to understand what it takes to achieve your bottom line.
4 Considerations Before Starting a Freight Brokerage:
With such a small barrier to entry, new freight brokerages pop up daily. When compared to a franchising opportunity such as a restaurant or coffee shop, starting a freight brokerage is must cheaper. This draws many inexperienced individuals to enter the market with little to no chance of success. On average, for every three new freight brokerage authorities that are issued, only one remains active after two years. That alone shows us a 67% turnover without even looking at the actual profitability of the freight brokerages that remain. Further, the W2 model of freight brokering shows an even more dramatic statistic. Nearly 95% of newly hired brokers turnover within the first 6 months. In such a competitive market that requires an extremely high level of sales proficiency, cold calling, and relationship building it becomes survival of the fittest as in any other sales-driven market. The successful brokers are the ones that excel in these areas and shine above their competition.
The amount of work that goes into the first 6 months as a broker is what weeds out the failures from the successful freight brokers. It’s common to make roughly 100 calls per day to prospective shippers in order to build a book of business over time. Additionally, you’ve got to be really good on the phone for those calls to be worth your time. For freight brokerages, prospecting never stops, once you build a book of business, but it is the number one focus for new brokers simply because they will never turn a profit without a customer to pay them for their services. The illusion that building a book of business is easy and anyone can do it is simply not the case. Ask any successful freight broker how they built their book, and they will likely agree.
Although the startup costs are much less than other industries, they still do exist. Determining the break-even point for a freight brokerage is important since you must scale your business to a certain level before it is financially worth it to get your own authority. The freight agent model easily avoids this for freight brokers since agent-based companies have already scaled to a healthy level that can support independent agents with little added expense. There are a handful of mandatory startup costs, and even more supplemental costs that you can expect, but aren’t technically required.
Here are the bare minimum startup costs:
- DOT Authority: $300 application fee
- Bond: $1,800 – $10,000 annually (depending on credit)
- Insurance: $1,500 – $3,000 annually
With these three items in place, anyone can legally operate as a freight brokerage. That being said, they won’t likely be successful without additional tools and expenses that will fuel their business and sales.
Here are some supplemental costs that you can expect:
- Transportation Management System (TMS) – this is the software that you use to manage your load building, dispatching, accounting systems, etc. While you can operate without it, a properly scaled freight brokerage views their TMS as a revenue multiplier since it makes their job more efficient. An average TMS company charges roughly $1,500 as a setup cost with monthly costs of about $500 depending on the features included
- Load Boards – it’s inevitable that you’re going to rely on load boards to cover some of your freight. You can expect to pay roughly $300 per month for access to the most common loads boards.
- Cashflow – the gap between your customers paying you, and you having to pay carriers is what determines how much liquid cash you need on hand to keep your business afloat. It is often recommended to have 3-6 months of revenue on hand as retained earnings to provide adequate cash flow. Rather than having funds available, many freight brokers rely on factoring companies to provide cashflow for their business. Factoring companies will often charge roughly 3.5% of a freight broker’s receivables to provide this service. This can lead to an awfully expensive cost.
- Wages – this depends on the size of a freight brokerage, but at some point, you will likely need to hire someone to assist you with your company. This can be something as simple as a part-time helper to manage accounting or dispatching while you continue to grow your book of business and win more loads.
As you can imagine, these can add up very fast. Therefore, an initial investment and long-term customer stability are crucial to success. The benefit is, you have 100% control over every attribute of your company, and you retain 100% of what’s left after all expenses are paid. Because of the costs involved, most freight brokerage owners fail in the first 1-3 years because they didn’t have the startup cash or recurring revenue to sustain their operation.
The back-office functions are absolutely necessary no matter how small or large your brokerage is, but it takes time away from you that could be spent growing your business and selling freight. You’ve got to be really good at running a business and brokering freight to succeed with your own authority. I know a ton of high producing freight brokers that don’t know the first thing about running a company. The same goes for the opposite; just because some has succeeded at starting businesses in the past does not mean they are cut out for brokering freight. The common back-office tasks include AR/AP, credit, carrier vetting and freight claims. These are efficiently managed in agent-based brokerages because specialized employees in each department are skilled in their own specific tasks. They leave the brokering to the freight agents, while taking care of the required administrative tasks that most brokers don’t want to worry about. Hiring specialized employees comes at a cost, so as previously mentioned you need to know your break-even point and have recurring revenue. To take it one step further, hiring an employee to run your back-office should only be done if that hire is going to enable you to increase your overall sales. To say it simply, they need to be worth their salary.
Yes, risk and reward have a correlation, but there are many risks that licensed freight brokerages have that freight agents or W2 employees do not. The most common risk involved your receivables. Unless you have a receivables insurance company backing your invoices (which costs a lot of money), you are taking full risk on any invoice that is not paid or that might be short paid. If a customer goes out of business, you lose. If a customer disputes a charge, you lose. If a claim arises and the customer holds payment, you lose.
Getting your own authority as a freight brokerage is a great way to truly run your own business and retain 100% of your net profits. It’s not for everyone though, and you need to make sure you have a reliable customer base that will continue to work with you under your own new authority. Run the numbers and figure in risk; if you will truly earn more with your own authority and you desire to take on the additional functions that go along with it, this is a great option for you! If you don’t want to worry about back-office functions, cashflow, risk, or startup costs then you may want to consider the freight agent model, which can allow you to keep 70% of your profits with zero back-office work.