by Nathaniel Cross and Benjamin Kowalski, hosts of the Freight 360 podcast
Many people think that starting their own brokerage is an easy and lucrative way to find success in the freight broker industry. While there are certainly perks to becoming a freight broker (for instance, you get to be your own boss and keep 100% of your net profits), there are also a number of risks and costs that you should consider before determining whether it’s the right choice for you.
Keep in mind that while the initial steps of how to become a freight broker are simple enough, becoming a successful one is more complex. Because many people forget to consider the challenges before diving into the field. Freight brokerage has some of the highest turnover of any business, with many brokers failing within their first year. That’s why we’ve put together this guide to help you join the third of freight brokers that survive and even thrive in the long term.
What is a freight broker?
A freight broker serves as an intermediary or middleman between shippers and motor carriers. Shippers have freight that needs to be moved. And the motor carriers, or trucking companies, have the physical trucks to haul the freight. The shipper hires the freight broker to connect them with a carrier to move the shipment. The broker never takes actual possession of the freight, they solely facilitate (broker) the transaction. A licensed freight broker maintains a legal authority from the Federal Motor Carrier Safety Administration (FMCSA), and can hire employees or even contract independent agents to operate under their authority.
Freight brokers make money by charging the shipper a higher rate than the truck costs. This markup is the margin that they use to operate their business and ultimately make money. That margin is generally around 15 percent, though it can fluctuate based on the market. For example, if a broker charges $1,000 to their customer and pays a trucking company $850, they would profit $150 on the transaction.
For more on this. Check out our video How to Become a Freight Broker or Freight Agent?
How to become a freight broker
The basic requirements for becoming a freight broker are quite simple, which is why many people come to us asking how to become a freight broker without any experience. This low barrier to entry is one of the main reasons for the high turnover in new brokers.
There are only a few things you need to start a freight broker business:
- Operating Authority: You need to get broker authority from the Federal Motor Carrier Safety Administration (FMCSA) using the Unified Registration System. There is an application processing fee and it usually takes four to six weeks for your application to be processed. For individuals who want support through the entire process, DAT Authority service is a great option.
- A Surety Bond: Every freight broker needs to have a surety bond or trust fund worth $75,000. That money ensures that if a freight broker doesn’t live up to their contract with their carrier, the bond company or trust fund will pay the carrier on their behalf. You can obtain surety bonds through an insurance company or by working with a company, like DAT, that partners with an insurance provider to offer a freight broker bond with a special rate for their customers.
- Process Agents: You will need to file a list of process agents (Form BOC-3) with the FMCSA. Process agents can be served court documents on a broker’s behalf in the event of a court action or lawsuit. Since you must have a process agent listed for every state in the US, process agent companies exist as a one stop shop by maintaining offices in all 50 states.
- Freight Broker Training: Although not an official requirement, it’s helpful to review the basics before you jump in to starting a new business. Learn more about how to become a freight broker, with the Freight Broker Basics Training Course.
- Insurance: Fast and cost-effective all-risk smart coverage on a per-load basis.
A service like DAT Authority can help you meet these key requirements and get started on your freight brokerage.
How much does it cost to become a truck broker?
While the startup costs for a freight broker are lower than those in many other industries, they can still be substantial. One of the most important steps of starting a freight brokerage is determining your break-even point, since you will not earn any money until these costs have been covered.
When assessing the costs of becoming a freight broker, you need to consider the startup costs as well as the many supplemental costs that you can expect to face. The minimum costs you need to pay to legally operate as a freight broker are:
- DOT Authority: $300 application fee
- Surety Bond: $1,800 – $10,000 annually (depending on your credit)
- Insurance: $1,500 – $3,000 annually
- Processing Agent: $50- $150
On average, that comes to a total of around $5,000 to $10,000 in bare minimum costs. However, that number doesn’t include the supplemental costs that can be the difference between success and failure as a freight broker. Additional costs to consider are:
- Transportation Management System (TMS): TMS software helps you manage your freight brokerage, which includes helping with load building, dispatching, accounting systems, and more. While it is technically possible to operate without a TMS, the software is generally considered a revenue multiplier within a properly scaled business. On average, TMS companies charge $1,500 as a setup cost with monthly costs of about $500, depending on the features included.
- Load Boards: No matter how many cold calls and personal connections you make, you will inevitably need to rely on load boards to cover at least part of your freight. The best resources, like the DAT Load Board, can represent the difference between success and failure for a business. Successful brokers also know how to tap into useful tools from load board providers, like pricing tools, carrier monitoring, onboarding and load tracking.
- Cash flow: The gap between when you have to pay your carriers and when you get paid by shippers determines how much liquid cash you need to have on hand at all times. It is generally recommended that you have three to six months of revenue on hand as retained earnings to ensure adequate cash flow to be able to cover all your operating expenses. Alternatively, you can turn to a trusted factoring company, like OTR Solutions, for quick payment of invoices to address cash flow issues.
- Insurance: Although it’s not required, most brokers will obtain additional insurance such as general and property liability, contingent cargo, workers compensation, and errors and omissions (E&O) policies to offset risk in their operation.
For more on this. Check out our video How Much Does it Cost to Start a Freight Brokerage?
Is being a freight broker hard?
For every three new brokerage authorities that are issued, only one remains active after two years, which answers this question with a resounding “yes.” Of course, that doesn’t mean being a successful freight broker is impossible — it simply means it takes a lot of hard work. If the concept of making over 60 cold calls every day to build a book of business and navigating a wide range of back-office tasks sounds daunting, you may be better suited to start your career as an agent or employee of a brokerage. And then work towards your goal of owning your own freight brokerage in a year or two.
Although many find running their own business to be an appealing prospect, there are positives and negatives that come with starting your own brokerage. One obvious benefit is that you get to keep 100 percent of the net profit produced by your business. On the other hand, you need to cover a range of startup and continuing expenses that can seriously eat into your profit margins. You also have to navigate a lot more risk when you own the brokerage. Unless you have a receivable’ insurance company backing your invoices (which is quite expensive), you are taking full risk on any invoice that is not paid or might be short paid.
However, when you work as an agent for a broker, you avoid all of these costs and risks. You Instead get to focus all your attention on being a successful freight broker. That means you don’t need to do any of the back-office tasks (like AR/AP, credit, carrier vetting, and freight claims) that form an essential part of running your own freight brokerage. While it’s true that you don’t get to keep 100 percent of the profits as you would with your own business. Freight agents are often able to keep their own customers, meaning you can build your own equity and gain experience without facing serious risks.
Getting experience and training
Success as a freight broker depends largely on the training and experience you have before you get your trucking authority. There are a number of ways you can go about getting that training, but the best way to do it is to hire a coach or to work with someone who is already succeeding in the field. Other ways to learn include listening to podcasts and following blogs, like Freight 360, or investing in freight broker training programs that teach you the skills you need to succeed as a freight broker.
It’s also important that you open yourself up to the ongoing learning process. Before you get your own authority, you should realize that you will never be perfect at this job and that the people who succeed are those who keep up with the industry trends, learn the new tools, and adapt to the changes in their environment. Even after you’ve started your business, you should continue to network with other successful brokers and, if possible, find a coach or mentor who can continue to guide you.
Success as a freight broker depends largely on the training and experience you have before you get your trucking authority. There are a number of ways you can go about getting that training, but the best way to do it is to take a freight broker training course, hire a coach, or work with someone who is already succeeding in the field. Other ways to learn include listening to podcasts and following blogs, like Freight 360, or investing in freight broker training programs that teach you the skills you need to succeed as a freight broker.
Finding customers and carriers
There’s no denying that finding customers (shippers) and carriers takes work. When it comes to finding customers, you’re going to need to do a significant amount of cold calling. You can find a variety of databases and directories online (plus paid leads lists) that give you contact information for shippers that you can call. You can also set up Google Alerts with industry keywords to find companies popping up or projects happening. Once you start making connections, you can use referrals to help grow your business.
Given how many calls you need to make, it’s helpful to batch your contacts before you begin calling each day. It doesn’t matter how you batch them (by region, commodity, etc.), just as long as you have a plan before you begin calling. That intention and thought will lead to better results.
For more ways to gain customers Episode 51: How-to-target-new-customers
The process of finding carriers is different from that of finding shippers, and it presents its own challenges since you also need to vet trucking companies before you can use them. The best way to find carriers is by using a load board to post your loads or search for trucks. Plus, the DAT Directory, which is included with every DAT load board plan, is a great way to research new carriers to work with. With a load board, you can also save searches so even if there isn’t a matching truck available when you conduct your search, you’ll be notified as soon as one is posted.
Your customers expect that their products will get to their destination without an issue, so vetting carriers is also an important piece of the puzzle. Before you use a carrier, you should:
- Check their carrier authority: You can use the Company Snapshot tool from the FMCSA to gather crucial information in determining if a carrier is trustworthy. In addition to ensuring that they have an active carrier authority, you can see their length of authority, fleet size, safety rating, and inspection statistics to give you an idea of how reputable they are.
- Look at reviews: You can see carrier reviews in the DAT Directory, or check Google. Focus on trends instead of specific negative reviews (after all, someone is more likely to leave a review after a bad experience than a good one) and see if you find frequent reports of the same issues.
- Check that they meet insurance requirements: You need to make sure the carrier has the proper level of insurance to cover your customers’ requirements. You can view insurance information on the FMCSA website.
- Get subjective feedback: If you aren’t sure about hiring a carrier, try to get some feedback by requesting references and referrals from other brokers/shippers they’ve worked with in the past.
Avoiding common pitfalls
One of the major reasons why there’s such a high turnover rate among freight brokers is because they encounter several common challenges and pitfalls. The biggest pitfalls to avoid are:
- Lacking the knowledge to succeed: You need to learn about the freight industry before you can build a company around it. That means researching how to be a freight broker and how to run a business before you start off on your own. It’s as simple as that.
- Not understanding costs and cash flow: You need to understand your own costs and changing freight rates so you can make accurate pricing models that incorporate your overhead and don’t result in losing money on each load. You also need to make sure you have enough cash flow so you don’t have to turn down opportunities to expand your business because you can’t get more lines of credit.
- Not embracing technology: From TMS, to load boards, to rating tools, and more, there are a huge number of technological solutions available to help you with your freight brokerage. You should keep up with new developments in technology as well to ensure you are always using tech solutions to the fullest.
- Trying to be a jack of all trades: Focusing on one specific area of freight that you can excel in helps you stand out from the competition. That way you can market yourself as an expert in one specific corner of the industry.
- Forgetting the importance of relationships: Your carrier and customer relationships are essential to the success of your business. You can’t do your job if either of those parties ceases to exist, so make sure you’re devoting energy to strengthening those relationships and offering good customer service.
For more on this. Episode 53: The Basics of Brokering (a Typical Broker’s Day)
Succeeding as a freight broker
While there are certainly challenges that come with starting a freight brokerage, if you follow the recommendations in this guide, you can give yourself the best chance at success. The most important thing to remember is that being a freight broker isn’t for everyone, so make sure you “learn before you jump” and become familiar with the industry and the role before you start your own business.
DAT customers are eligible to receive an exclusive discount on Freight360 training, with 20% off this Freight Broker Basics Course. The standard price is $749, but is available through DAT for $599. Sign up today to receive your promotion or click here to learn more about this Freight Broker training course.
About the Authors
Benjamin Kowalski is a certified Business Coach with over 17 years of experience in sales, leadership, and management. He has maintained ranking within the top 5% of 5,700 companywide brokers throughout his tenure as a Senior Logistics Account Executive. His average client sees their sales increase over 25% in their first year.
Nathaniel Cross launched Freight 360 in 2019. He began his career in logistics in the military and continues to serve as a logistics officer in the Army National Guard. He entered the private sector over 10 years ago with an asset-based LTL carrier before transitioning into the 3PL sector. Nate currently serves as the Vice President of Agent Development & Services with Pearce Worldwide Logistics.
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