The Role of the Freight Broker in the Shipping Industry

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Estella Walker
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1 The Role of the Freight Broker in the Shipping Industry So what is a freight broker exactly? Simply put, it s an individual or a company that brings together a shipper that needs to transport goods with an authorized carrier that wants to provide said service. The freight broker falls into the category of transportation intermediary, which is a company that is not a shipper, nor is it an asset-owning carrier, but plays a pivotal role in the movement of freight. Transportation intermediaries leverage their knowledge, technology and people to help both shipper and carrier succeed. Brokers provide an important and valuable service to both carriers and shippers. They facilitate carriers filling the trucks and earn a commission for their efforts. They assist shippers in finding reliable motor carriers that they might not have otherwise known about. As a matter fact, some companies use brokers as their traffic department, allowing the broker to completely coordinate all their shipping needs. Brokers aren t new to the transportation industry; they ve been around since the industry itself began in the early 1900 s. Prior to the seventies, however, regulations governing brokers were so restrictive that few firms were willing to

2 even try to gain entry into the industry. But with considerable changes in the federal transportation policy during that time, regulatory restrictions eased, creating new entrepreneurial opportunities in third-party logistics. Identifying The Players in the Industry An industry of this enormity and diversity needs a wide range of participants to thrive. Some of the titles can be slightly confusing, and some of their roles may overlap. But to keep things as simple as possible, let s look at who the players are and what they do. Freight broker. The middleman who connects shippers and carriers. Shipper. An individual or business that has freight to move. Carrier. A carrier is a company that provides transportation for goods. There are two types of carriers: private (a company that provides transportation of its own cargo) and for hire (a company that is paid to provide transportation of freight belonging to others). Freight forwarder. Often confused with freight brokers, freight forwarders are actually completely different. Forwarders take possession of the goods, consolidate numerous smaller shipments into one larger shipment, then arrange for transportation of that shipment using various shipping methods (air, water, land). Import-export broker. Are facilitators for importers and exporters. Importexport brokers work with U.S. Customs, other government agencies, international carriers, and other companies and organizations that are in international freight transportation.

3 Agricultural truck broker. Generally fairly small and operate in one geographic area of the country. Unregulated agricultural truck brokers arrange transport services for exempt agricultural products. Shipper s associations. Are exempt, nonprofit, co-op organizations formed by shippers to reduce transportation costs by pooling shipments. Shipper s associations operate in a very similar manner to that of a freight forwarder, but service is limited to their members and is unavailable to the general public. In a perfect world each player in the industry would handle its traditional role and that s all. However, the transportation industry is evolving so quickly that the once distinct lines are blurring. Also, it s very common for a freight broker to expand his or her business by creating subsidiaries or additional companies that offer other freight services. Education and Experience Needed to be a Freight Broker Brokers can come from any industry we have found that mortgage brokers and auto brokers generally have the greatest degree of success in the shortest time period. Regardless of background, the brokers that are most successful are those who are skilled in relationship sales. In this case, industry skills can be taught and adopted much more quickly than proper sales skills. Being able to make contacts while gaining crucial experience, is necessary to succeed in the business. Many brokers opt to use agents to develop a broader scope of operations. To clarify, an agent is an independent contractor who represents a freight broker in a specified area. This enables you to offer a local presence when you might not have the volume to justify the opening of your own office.

An aspiring broker will have the opportunity to focus on customers and building relationships by connecting with a brokerage company that provides good tools, is financially stable, and flexible in

4 An aspiring broker will have the opportunity to focus on customers and building relationships by connecting with a brokerage company that provides good tools, is financially stable, and flexible in fitting into their own process, just to name a few. For example, Trangistics is based in Oregon, but they have agents in many other states such as California, Nevada, Colorado, Alaska, Texas, Illinois, North Carolina, Alabama, Florida, Georgia, etc. Because their agents aren t brokers and because they re home-based, their start-up materials are minimal and typically consist of a computer, telephone and fax. An agent s work is very similar to what a broker does, but the agent functions under the auspices of the broker and the broker is the one responsible for such issues as paying carriers and maintaining the required surety bond. Seasoned brokerages will also carry contingent cargo and liability insurance that provides coverage when the carrier s insurance fails. This is a sign of good brokerage with solid a financial foundation and provides additional assurance to an agents customers that their freight will be protected. The Role of the Freight Broker In the Shipping Industry Finances, Operations, Record Keeping, etc.

5 Financing Or, Did you know that a broker is also a banker? As shocking as this may be, it s not unusual for a broker to need a credit line somewhere between $250,000 and $500,000 to pay carriers before being paid by shippers. If you don t pay trucks in a timely manner they will not haul any freight for you, and obviously if you have nobody to haul your freight, you don t have a business. As an agent, the most important thing you can do is to make sure the broker you are working with has a solid financial foundation, sufficient insurance, and proper licensing. On the flip side of this point, it is a strong indicator that a broker may not be meeting those requirements in financial security if haulers start giving you unusually high quotes, don t return your calls or s, and/or just refuse to haul your freight. It usually means they are not getting paid by your broker. Operations and Expenses Freight brokering is conceptually pretty simple: The shipper (or consignor, as they are sometimes called) contacts you with a load. You complete your own internal paperwork and check with your carriers to see who can haul it. If you already have a relationship with a carrier, you send them an addendum to your basic contract that describes the particular load and the rate. If the carrier agrees, the company s representative signs the document and sends it back. (If you don t already have a relationship, you ll need to set up an agreement before you finalize the deal on the first shipment.)

6 Next, they dispatch a driver. It is recommended to require that the driver call you to confirm that the load has been picked up, and again when it s been delivered. There are technologies available in the industry that allow agents to track loads online as well. After the shipment has been delivered, the carrier will send you an invoice and the original bill of lading. You invoice your customer, pay the trucker and then, repeat the process for every shipment. Record-Keeping Requirements The Code of Federal Regulations is highly specific about the types of records you must maintain. While as an agent, you may keep a master list of shippers and favorite carriers to avoid repeating the information, your Broker is required to keep a record of each transaction. Each record must show: the name and address of the shipper; the name, address and registration number of the originating carrier; the bill of lading or freight bill number; the amount of compensation received by the broker for the service performed, as well as the name of the payer; a description of any non-brokerage services performed in connection with every shipment, or other activity, the amount of compensation received for the service, and the name of the payer; and the amount of any freight charges collected by the broker and the date of payment to the carrier.

7 These records are kept for a period of three years, and each party to a particular transaction has a right to review the records relating to that transaction. Physical Location One of the most appealing aspects of being an agent for a freight brokerage business is that your physical startup requirements are relatively small. Unlike a carrier or freight forwarder, you don t need a truck, warehouse or loading dock. Your customers aren t likely to come to your location, so you don t need to worry about an impressive reception area or elegant offices. In fact, while there are some definite advantages to a commercial location, an agent can easily operate from a home office or even a spare bedroom in their home. Where you operate depends on your resources and goals for your company. Many agents start from home with the goal of moving into commercial space as soon as they re established with a few clients. This varies between agents and it is a great goal if that is important to you. The major benefit of being a home based agent is the fact that it significantly reduces the amount of startup and operating capital you ll need. But there s more to consider than simply the upfront cash you ll need. Do you have a separate room for an office, or will you have to work at the dining room table? Can you set up a comfortable workstation with all the tools and equipment you ll need? Can you separate your work area from the rest of the house so

8 you can have privacy when you re working-as well as get away from the office when you re not? By contrast, starting in a commercial location requires more initial cash than starting from home. If you decide to do this, your range of options is fairly broad, and your choice should be guided largely by the goals you ve set for your business in terms of market and growth. Consider office buildings, light industrial parks and executive suites. Unless you have an extremely large home, you ll find that a commercial location allows you to create a setup that s more efficient and practical than what you might be able to do in a spare bedroom. Pricing & Income Freight charges are based on a number of variables, but the main factors are the weight of the load, the amount of trailer space that will be required and the distance it must travel. Rates are also affected by the type of truck needed (flatbed, van, refrigerated, RGN, etc.), whether the driver needs to make one or more stops to pick up the freight, and whether the driver needs to make more than one stop to deliver the goods. A shipment will be entitled to one pickup and one delivery with no extra charge; additional stops can usually be negotiated with the carrier and will likely depend on their market potential to get their next load. Before you begin shopping for rates for specific shipments, always get an idea of the current going rates for the types of shipments you re likely to be

9 handling. This can be done by requesting rates from several carriers and studying them. Your income is generated by the commissions you earn on each load. The margin is the difference between what the shipper pays the brokerage and what the brokerage pays the carrier, also known as gross profit. An agent typically earns a percentage of the margin and varies by brokerage. A typical brokerage offers their independent agents between 50% or 60% of the margin, some even more with high volume. Determining how much of a margin should be added is not always a straightforward process. Many see pricing as a black art based on many factors such as the freight s origin and destination, commodity type, and analyzing the market environment such as are there alternative loads for the truck to chose from, or are there many trucks in the area that are competing for your load. Another significant factor is determining how price sensitive your shippers may be. Ultimately, the agent s role is to aggregate all of this information and determine what the market will bare. A typical margin can range between 10 and 15 percent of the shipping charges, sometimes higher depending on the type of freight. Keep in mind that your commission is your gross revenue, and out of that you must pay your overhead: rent, taxes, payroll, sub-agent sales commissions, utilities, debts and so on.

Role of the Freight Broker/Agent in the Transportation Industry Bringing together those who haul goods with those who need goods hauled, and getting a fee for the service that s the basic role of the

10 Role of the Freight Broker/Agent in the Transportation Industry Bringing together those who haul goods with those who need goods hauled, and getting a fee for the service that s the basic role of the freight broker. Seems simple enough when it is described that way. If only it were that simple. We have to plan for everything from truckers getting paid, loads getting to their final destination on time, environmental emergencies like wildfires or hurricanes, and get it done on time and on budget. Plan For Success Everything that moves has to move at least a portion of the way, if not the whole enchilada, by truck. It goes to follow, you may think, that every company is your possible customer, right? No? So what s wrong with going after anyone and everyone who might have to ship something on a truck? Well, if you take this shotgun approach, you are

11 suddenly dealing with millions of companies and individuals with different needs. It is virtually impossible for an agent to communicate effectively and provide accurate services with a market of this scale. Narrow It Down To put it in perspective, can you afford to send a single, direct mail piece to a million prospective customers? Simply put, no. But if you narrow that down to maybe 750 to 1,500 customers in a specialized niche, in a particular area, suddenly that direct mail campaign is affordable, manageable, and effective. Need other reasons to narrow your focus? Bandwidth is certainly one factor to be a good agent: Focus will give you credibility and increase your value to the customer. By focusing on a niche you will be able to understand your customer s industry, see any issues in advance, and offer valued, practical advice to your customer. The customer then sees this as a relationship, not just a broker out to extract their money. For example, if an agent specializes in equipment auctions, she could advise the customer what the risks are when gear is left in the field/yard after the auction. Sometimes auctions are held in open fields without security (parts are stolen from equipment, e.g. tail lights, to make another piece of equipment ready for shipping). If you can advise your customer about potential issues and how you might help them resolve the problems before

12 they become problems, you will increase your value to the customer, cementing your value to them. This will likely lead to increased income. A customer that values a relationship is likely to pay a higher premium, benefiting the agent s bottom line. If the broker understands specific geographic road restrictions where a customer wants to ship freight, the broker can advise the customer on alternative plans. In Northern California, for example, on certain highways there are length restrictions. If a customer wants to bring in a 53 van (which is not allowed on some roads), you could explain the restrictions to them and provide alternative solutions. This allows the customer to see that the agent is not only knowledgeable, but also looking out for them beyond this payday. Credibility in a specific industry helps an agent expand to other customers in the same industry by showcasing their expertise. Build Your Customer List Some questions to keep in mind as you are building your list of dream customers: Who are your potential customers? Where are they located?

13 How many of them are there? How do they currently transport freight? Who are they currently using to broker their freight? (may take some digging to figure out). What can you offer them that they are not getting now? (VERY IMPORTANT) How do you compare to your competitors? What services do you offer (specifically)? How can you persuade them to bring their business to you?

14 Do you have the infrastructure (support system, experience, backing, etc.) to assure success? In conclusion (or is it just the beginning?), just like any career, being a successful freight agent or broker involves a great deal of hard work, focus, know how, daily learning, and a strong support system. -LTB FREIGHT CALL US TODAY TO SCHEDULE YOUR TRAINING!

DAT Keypoint SPECIAL REPORT. Growing Your Small Business Steve Blair, General Manager, Keypoint Transportation Software

DAT Keypoint SPECIAL REPORT. Growing Your Small Business Steve Blair, General Manager, Keypoint Transportation Software DAT Keypoint SPECIAL REPORT Growing Your Small Business Steve Blair, General Manager, Keypoint Transportation Software SPECIAL REPORT 2 Introduction: Growing Your Small Business While there are some risks