What does a freight broker do?
A freight broker is the ‘middle-man’ between a shipper (like a factory or distributor) who has products/materials that need to be shipped and a carrier (trucking company/owner) who can transport the goods. Freight brokers are often a third-party, who manages negotiation with the carrier and the shipper to get loads delivered. Brokers make money by negotiating a price with the shipper and the fleet operator, then keeping the difference.
For instance, lets say a freight broker negotiates with a shipper to get their load across the country for $7,000. They will then find a trucking company/operator who will transport the load for the lowest possible price, let’s say $6,000. The broker will pay the trucking company and keep the $1,000 difference as their gross revenue.
Running a successful freight brokerage is all about relationships.
Freight brokers depend on building relationships on both ends of the chain. It’s through their negotiation and management that brokers can connect shippers to carriers, cargo can be delivered, and timely payments can be made.
Smart trucking companies will do a lot of research before entering into a broker agreement since their earnings can be at risk. They will look at how the broker conducts business, their professionalism and exposure, reviews, licensing/bonding, and financial credibility.
When a carrier relies on a broker, they are quite literally putting the future of their business into the hands of another. Brokers need to be able to prove a strong reputation to retain and build their clientele. This includes the capability of fulfilling their payment obligations to accounts, vendors, and creditors on time.
Credibility is a huge factor.
Brokers need to be prepared for their business credit to be pulled for multiple reasons and on a consistent basis.
- The shipper will pull credit because they’re trusting the broker with their load.
- The brokers credit will offer detailed information about payment patterns and financial responsibility (or lack thereof). If the broker has poor credit, it’s an indication that they may go out of business or be unable to deliver goods.
- The trucking company will pull the brokers credit because they want to make sure there is a consistent history of making payments on time. Carriers need to be able to depend on timely payments from the broker to fund their operations and turn a profit.
- By law, all freight brokers must offer surety bonds.
- Bond issuers pull credit before issuing any kind of surety bond to measure risk before approving the account.
(there are a few variables here)
- If the broker uses a factor their credit will be reviewed to determine the risk in approving the advance on receivables.
- If the account hiring the freight broker to ship its goods uses a factoring company, the brokers credit will be reviewed. Invoice factoring is a common means for fast financing. But before a factoring company will agree to the advance on receivables, they will check the credit of all the shippers accounts including any brokers they use. If the broker has poor or marginal credit, the invoice factoring may be denied because the factor will view the invoice as too great of a risk.
Many different parties will use business credit to measure risk and decide whether to conduct business. Having weak or poor scores can potentially ruin a freight brokerage. Freight brokers need to be able to maintain strong credit daily to solidify and build their relationships. This helps meet the goal of increased profits, growth, and a competitive edge.
The stigma behind brokering:
Trucking companies should do a lot of research before working with a broker because the industry carries a lot of stigma and there have been many bad apples who disappeared without paying the trucker. In response to past corruptions, the federal government has issued regulations over freight brokerages that requires them to post $75,000 surety bonds. The purpose was to purge the industry of corruption and protect companies from brokers who would vanish with their money.
This a well-known issue in the trucking industry and serves as another reason that brokers need to be careful about maintaining their reputation in the industry.
Freight broker reputation checklist:
- Online presence
- Reliable customer service – timely response to customers
- Timely payments
- Great business and personal credit profiles
- Monitor all credit reports for information that may hurt relationships