Editor’s Note: As a shipper how do you know you are working with a reputable third party logistics company? Did you know by definition, a 3PL is considered a freight broker and must go through the process each year to invest in their own business so they can support those? Or are you a Logistics Manager curious about what it costs to become a freight broker either because you want to know that whom you are working with has done all the right things (you know, since they’ll be managing your freight) or because you yourself may want to be a freight broker? This post will explain what it takes for someone to acquire the legitimate status of freight broker.
Cerasis is a freight broker, who is bonded with the TIA’s $250,000 Bond. You can read more about that bond and why we chose going above and beyond the requirement of $75,000 here.
The Cost to Be a Freight Broker
Does your next career move involve moving products from point A to point B? If you’ve been eyeing the idea of starting your own freight brokerage, the startup costs have definitely been on your mind. The startup price tag may seem mysterious and daunting, and while the exact cost will vary depending on your location, business experience and so on, it’s possible to get a rough estimate before starting.
Let’s start by taking a look at all the associated cost to be a freight broker, and then see how you can reduce some of them.
1. Licensing Costs
Freight broker licenses are issued federally and are handled by the Federal Motor Carrier Safety Association. They require a one-time non-refundable fee of $300, and if, like many brokers, you want to register as both a motor carrier and freight broker, you will need to pay this fee twice.
You will also need to obtain a general business license for the state you operate in. Requirements vary by state, making it difficult to give a cost estimate; a good place to start is the Small Business Administration website.
2. Bonding Costs
Another cost you may have come across is your freight broker bond. Don’t confuse your bond with insurance – we’ll get to the later in the next section.
A freight broker bond is a pre-licensing requirement of the FMCSA. It serves as protection for the people you work with: shippers and carriers. Essentially, it represents a three-party agreement between you, the FMCSA and a surety bonding company. The bonding company underwrites the bond and guarantees to the FMCSA that you will operate your business lawfully.
If you fail to comply with the terms of the bond, you can be the subject of a claim. In a successful claim, you’ll be legally responsible for compensating the plaintiff.
The total bond amount for freight broker bonds is set to $75,000, but the premium you pay will depend on your credit score. Nearly all freight brokers will pay a premium between $900 and $2000. Later, we’ll go through some ways in which you can decrease your surety bond costs.
3. Insurance Costs
Now that we’ve covered other people’s protection, it’s time to cover yours as well. A good insurance policy is vital for protecting your business, though it is not required by the FMCSA Freight brokers are generally recommended to carry property and general liability insurance, as well as contingent cargo, which is designed to offer your clients extra protection in case a carrier’s policy doesn’t cover damages.
If your business expands and you hire employees, you may be required by your state to obtain workers’ compensation insurance. This is the only type of insurance policy that you may be required by law.
The exact costs of an insurance package are hard to calculate as they will depend on your particular situation and how many types of insurance you have. However, a good estimate would be around or in excess of $3,000 a year.
You may be tempted to skip insurance to cut down your startup costs, but that’s usually not a great idea. You should have a comprehensive risk-handling strategy planned out and good insurance is indispensable for this.
4. Business Equipment and Location
Many first-time brokers start out small, so they choose to save on rent and work from home in the beginning. This is an easy way to keep your costs down, so if money is tight, wait until your operation starts to grow before you rent an office.
To set up a home office, you won’t need too much – a computer, telephone, fast Internet connection and good freight broker software should do it. Software costs should be in the range of $600-$1200, depending which you choose. Here’s a good place where you can compare different types of freight broker software.
You can also think about how much money you want to put into marketing your business. Don’t make this decision lightly – the success of freight brokers is largely dependent on how good their marketing is.
5. Money-Saving Tips
You have a good idea now what some of your startup costs will be in opening a freight brokerage, but you’re probably still wondering how you can cut some of these costs down. Certain costs are non-negotiable: there’s no way to save on the FMCSA’s non-refundable fees, for example.
But that’s not the case when it comes to your freight broker bonds. As we already established, the premium you pay will largely depend on your credit score. Bad credit or a lack of credit history shouldn’t discourage you, though.
You may be able to save some money by including additional details in your bond application. For example, previous experience in the logistics or trucking industry will certainly be considered a plus. The same goes for your personal and business financial statements: if you can demonstrate strong liquidity, a bonding company will, in turn, be willing to decrease your premium. Finally, the surety agency you choose to work with is of prime importance. Choose experienced, nationwide agents who have an established network of trusted partners: they will be able to negotiate the best possible price on your behalf.
It’s best to be prepared when you’re applying for any type of surety bond, so here’s a freight broker bond guide you can follow and use as a reference.
How did you keep costs down while starting out as a freight broker? Share your experience or leave us a question in the comments below.