DISPATCHER'S BLOG
Starting in Freight Brokering Vs. Truck Dispatching
Today we're going to discuss the startup of a freight brokerage and see how it compares with starting up a truck dispatching service.
As we have discussed in the previous post, there are three popular choices when people are trying to get into the transportation industry. One is dispatching, another is trucking, and the third one is freight brokering.
Today we will discuss freight brokering and see how hard it is to open a freight brokerage and obtain your license.
For those still confused about the differences between freight brokers and truck dispatchers, let me provide you with a quick definition.
An independent truck dispatcher is someone who assists motor carriers or trucking companies with the load-booking process.
Freight brokers, on the other hand, work with clients who need something shipped. Their duty is to find the most suitable transportation company for their clients' cargo. So, in essence, freight brokers match shippers with transportation companies. They charge a certain percentage as their commission for doing so, and that's how they make money.
Starting a Freight Brokering Business
There are a few essentials required to start a freight brokering business. First of all, you will have to obtain your freight broker license. To do this, you will have to go through the FMCSA application process, obtain a surety bond, and file a few other forms.
At this stage, your main expenses will be application fees, filing fees, and of course, a surety bond. The surety bond cost will depend on your financial and credit situation.
However, just like with dispatching, you don't have to spend too much money on the equipment. All you will need is a computer, a phone, and a few pieces of software. But other than that, you should be all set for your initial operations.
This puts the startup cost for a freight brokering business between that of truck dispatching and a trucking company. You will spend more money opening a freight brokerage than you would a truck dispatching service, but you will definitely spend less money than starting a trucking company.
The licensing process and the costs associated with starting your freight brokerage have a certain hidden advantage when compared to truck dispatching — a barrier of entry. While just about anyone can start a truck dispatching service, not everyone will be able to go through the application process and obtain the surety bond. So, not everyone will be able to start a freight brokerage. This gives you a certain advantage and a little bit less competition that you would find with the other business.
Freight Brokerages Can Be Remotely Operated
At the same time, just like a dispatching service, freight brokerages can be operated remotely. As a freight broker, you do not take possession of the freight. You can run your operations from your home, office, or even a vacation destination. Wherever you are, wherever you have access to the internet and a telephone connection, you should be fine.
Funds Needed for Operations
On the other hand, unlike dispatching, you will need to have some funds available for your operations. With dispatching, you don't really need any operating capital because you're just providing the service and charging your clients for the service you have provided. With freight brokering, you will be collecting payments from your clients, and you will be paying transportation companies for transporting the cargo.
This type of operational transaction can create cash flow gaps. Therefore, you may have to pay the transportation company before you receive money from your clients. You must have enough funds to cover these situations. Alternatively, you can use factoring companies to fund your operations. However, this will require a particular setup and careful financial planning.
Advantages of a Freight Brokering Business
So what are the main advantages of starting a freight brokerage?
Outsourcing Tasks
One of the main advantages is your ability to create a structure that will generate income for you without your active involvement. As an example, you could hire a team of freight agents to reach out to various clients, offering your services. You see, as we have discussed, not everyone can obtain a freight broker license. Some people like to do this type of work but would rather work under somebody else’s license.
So, you can provide a platform for those freight agents. They can work using your license and your company, and you will be charging them a percentage or a fee for this privilege. And that means that you could be making money without ever finding one client on your own.
Recurring Income
The second advantage of starting a freight brokerage is recurring income. You may land a client that ships something daily and sign a contract with that client for a full year. That would mean that you would make a commission every time the shipment goes out. If you can find several clients doing that, you will have recurring income from multiple sources.
Selling Your Business
And that leads us to the third advantage: selling your business. If you have a book of business, basically, your brokerage is generating a certain amount of money regularly, so other companies will be happy to buy your business.
I am familiar with cases when smaller family-owned brokerages grew large enough to be purchased for over a billion dollars. Of course, that took them some time and required significant work and effort. But it shows that there are opportunities to make this business so attractive that large companies would come in and buy it from you.
Freight Brokering Is a Medium Risk, Medium Reward Business
To summarize, I believe that freight brokering stands in between dispatching and trucking operations as a medium risk, medium reward type of business.
In terms of the startup cost, it sits in between the two. it's going to cost you more than starting a truck dispatching service, but it should cost you less than starting a trucking company. I would recommend starting a freight brokerage to someone who already has some sort of business experience.
If you are new to starting a business, and this is your first venture, you might be better off starting with the dispatching service. It is easier to start, does not require much capital, and has lower risk overall than you would have with freight brokerage.
And last but not least, just like trucking, freight brokerage could complement your dispatching operations.
Furthermore, by combining all three, you could create what amounts to a transportation conglomerate, where you are doing dispatching, freight brokering, and trucking. Such an arrangement could make it easier for you to obtain clients because, as a freight broker, you can sell your clients on the fact that you have a trucking department and you own your trucks, which could cover their loads if needed. Then your dispatching clients may be happy that you have a freight brokerage department that could source some direct freight from the shippers.
And, of course, your trucking department should be constantly busy because you have both dispatching and freight brokering departments looking for freight continually. And ultimately, this should generate income for your company from multiple sources.
© By Alfa X Logistics September 2022
Are you thinking about becoming a freight broker? If you'd like to learn more about starting a freight brokerage, we offer a course called the Simple Guide to Freight Brokering. You can learn more at www.LearnFreight.com.