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ОглавлениеWhat Does the Business Require?
The dissolution of the Interstate Commerce Commission, and other aspects of transportation deregulation, has left many industry players confused about what is regulated and what is not. This chapter addresses the regulatory and practical requirements of starting and running a freight brokerage, although state and federal laws and regulations are continuously changing.
Freight brokers must register with the Federal Motor Carrier Safety Administration (FMCSA). This is not a complicated process. Essentially, you must file an application (Form OP-1) and pay a filing fee, obtain a $75,000 surety bond or establish a trust fund, and designate agents for service of legal process. The registration will remain valid as long as these requirements continue to be met. Keep in mind, this is something that must be done by the freight brokerage business, not an individual freight broker or agent.
The surety bond or trust fund is evidence of financial responsibility. This means you must demonstrate that you have access to that amount of liquid assets to meet your obligations and pay any potential claims. You can either use your own resources or contract with a bonding company. Evidence of a surety bond must be filed using Form BMC 84; evidence of a trust fund with a financial institution must be filed using Form BMC 85.
Designation of process agents means that for each state in which you have offices or in which you write contracts, you must file a designation of person on whom court process may be served.
When your application is approved, you’ll receive a permit with a Motor Carrier (MC) number from the FMCSA that is your authority to operate as a freight broker within the United States. Beyond the regulations that govern your particular operation, when you act on behalf of a person bound by law or FMCSA regulations as to the transmittal of bills or payments, you must also abide by the laws or regulations that apply to that person.
In addition to federal requirements, you’ll need whatever business licenses and/or operational permits that are required by your local and state governments.
Check with your local planning and zoning department or city/county business license department to find out what you need and what is involved in obtaining these licenses and/or permits. For example, you may need an occupational license or permit issued by your city or county, a fire department permit if you are in a commercial location and/or open to the public, and/or a sign permit.
Prior to opening your own freight brokerage business, it’s an excellent strategy to first work for another company within the industry—either for a shipper, a carrier, or both. The more real-world industry experience you have, in addition to industry-specific training, the better off you’ll be. Through real-world experience, you’ll not only gain technical expertise, you’ll also make contacts that are critical to success in this business.
Cathy Davis entered the industry as an inventory control clerk for a river terminal, and then spent time working in sales for motor and air freight carriers. “I was fortunate to have been mentored by the owner of the carrier I worked for,” she recalled.
warning
Don’t try to get around the law. Penalties for evasion of regulation by motor carriers and brokers include a civil penalty of $200 for the first violation and at least $250 for a subsequent violation.
Her consulting business gave her the opportunity to learn even more about being a broker. She was an agent for brokers before becoming one herself, and that gave her both hands-on experience and an opportunity to build her reputation within the industry.
“I highly recommend this startup method with total disclosure of intent and a legal agreement,” she said. Later, she earned the Certified Transportation Broker designation through the Transportation Intermediaries Association (TIA), as did her daughters before they took over the Smyrna, Tennessee-based company.
Similarly, Chuck Andrews, who is based in Indianapolis, held senior positions with a major LTL carrier, was president of a truckload (TL) carrier, and has worked in railroad operations. “My whole background leading up to forming my freight brokerage company has all been in transportation,” he says.
Davis believed new brokers need “a strong sales background, good business advisors, and a desire for continuing education.”
Building Carrier Relationships
How can you build strong, positive relationships with carriers? “Pay on time, and pay reasonable rates,” said Davis. Of course, she added, having “driver-friendly” freight is a positive aspect, and communication is critical.
“We use a load-matching service to help find carriers, but also network with members in various organizations. We consider the carrier to be a customer and extend the same degree of professionalism to a transaction with them as we do with shippers.”
Establishing and building relationships with carriers and shippers will likely be your biggest startup challenge. “Because of brokers who have gone out of business (owing carriers money), truckers are very careful about who they do business with,” says Andrews. “If you do not have a history with that trucking company, he’s not going to be very aggressive in wanting to haul your load because he doesn’t know if he’s going to get paid or not. Even though you have signed all the papers and you’ve got your surety bond, he’s going to be leery until he gets that first check from you.”
tip
Know your rights: By law, common carriers are required to serve, deliver, charge reasonable rates, and not discriminate.
While there are services for brokers that are designed to help you easily find carriers, it’s almost entirely up to you to seek out, negotiate with, and develop relationships with shippers. After all, without shippers willing to pay you for your services, you have no business.
It’s a problem that only time can solve. “It took us quite a few years to build up our business,” Andrews says. “We currently have close to 7,000 truckers under contract to move our freight.” When he adds a new trucker, he presents himself as a reliable, professional broker by sending an information package that includes information on the company, as well as a listing of key personnel, bank information, and carrier references. “The hard part is getting that first load moved and then being able to build on that for your credit references.”
• Bond . . . Surety Bond
Many people do not have a clear understanding of what a bond actually does. Basically, it is an amount of money that you post to guarantee that you will do something you’ve promised to do. Probably the most common way you hear the term “bond” used is in criminal cases. When someone is arrested and charged with a crime, he or she can put up an amount of money (or something else of value) to guarantee an appearance in court. If the person shows up as promised, the money is returned; if he or she is a no show, the money is forfeited.
Because many people do not have the cash on hand to post the full amount of a required bond, they turn to a bonding company. The bonding company charges a percentage of the total bond to put up whatever amount of money is required. The money the bonding company collects is a fee and is not refundable. In addition to charging the fee, the bonding company may also ask you to post collateral, such as real estate or equipment.
Here’s where the confusion on bonds often occurs: A bond is not insurance you purchase; it is the collateral for a promise. And if you use a bonding company, you are still ultimately responsible for the total amount of the bond, not just the fee you paid to the company.
In the case of a freight broker, the surety bond guarantees that you will meet all your contractual obligations to your customers, and that you can pay any claims immediately. If you use a bonding company and that company pays any claims on your behalf you must repay the company, usually within 90 days. If you fail to repay, and have posted collateral, you will likely lose that collateral.
warning
Be sure to fully check the references and credentials of all the carriers you use, before you ever give them the first load. If you fail to do so and a problem occurs, you could find yourself responsible for the damages.
It’s important to understand the economics of the trucking business when you negotiate payment terms with your carriers. In the past, ICC regulations dictated that freight 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 brokers—or even shippers and carriers—and the conversation centers around customers you have in common. Protect the privacy of your customers and the confidentiality of their businesses. Not only is this a sound professional business practice, but you are prohibited by law from disclosing information to an unrelated party that may be used to the detriment of the shipper or consignee.
FIGURE 2–1: Golden Rules for Transportation Intermediaries
