What is a freight forwarder?
What is a freight broker?
Freight forwarder vs. freight broker
How to become a freight forwarder
How to become a freight broker
The BMC-84 Freight Broker Bond
What’s the difference between freight forwarders and freight brokers? Today we’re gonna go through each in depth and explore the major differences between the two. We’ll also go through how to get licensed as a freight broker or a freight forwarder.
Freight refers to any goods or commodities transported in bulk via transportation. In every freight transaction, there is a shipper, a carrier, and either a freight forwarder or freight broker. The shippers are the ones who need their products shipped. The carriers are the ones who deliver the products. There are two main intermediaries you can go through to get your freight transported to your desired destination: freight forwarders and freight brokers. Freight forwarders are companies that facilitate the transportation of goods on behalf of shippers, managing logistics and documentation across various modes of transportation. Freight brokers are intermediaries who connect shippers with carriers, arranging the transportation of goods and negotiating favorable shipping rates. Below we will discuss the difference between the two.
A freight forwarder, also known as a non-vessel operating common carrier (NVOCC), is an individual or business that organizes shipments from goods manufacturers to their shipping destination. Their job includes multiple aspects. Freight forwarders arrange the shipment of goods by storing their shippers' products and moving them to their final destination. The goods can be moved by the forwarding company or by a carrier they work with. It is important to note that the forwarders are responsible for the shipper's items. At the same time, the carrier is responsible for completing the task the forwarder pays them to do.
Freight forwarders are licensed under the Federal Motor Carrier Safety Administration (FMCSA) for interstate and international commerce. This means freight forwarding companies can handle shipments from one state to another or one country to another in addition to handling smaller-scale shipments within state limits.
We can look at real-world businesses to understand what freight forwarders are. Companies like FedEx and UPS are transport companies that offer freight forwarding services. For example, FedEx offers ocean freight forwarding services in which you can work with a sales representative to figure out how you want to store your products, how fast you want them delivered, and other specifics to the transportation of your cargo.
Similar to a freight forwarder, a freight broker also acts as the intermediary between a shipper and a carrier. Freight brokers find carriers for the shipper they are working with. They attempt to find and negotiate the best rates for their clients. The reverse can also be true: brokers find multiple shippers for one carrier. This relationship allows carriers to have a steadier supply of customers than if they were to find shippers by themselves. It is important to note that the carrier is directly responsible for the shipper's products.
While brokers do not participate in the physical shipping process, they help maintain open communication between shippers and carriers. Brokers can help both sides track their shipments and inform them of any changes or delays.
Freight brokers earn money by taking a commission from the transaction cost they mediate. This means that the broker will take a small percentage of the money the shipper pays the carrier or vice versa.
While both freight forwarders and freight brokers work directly with customers, their key differences are the following:
Freight brokers only act as the middleman between the shipper and carrier. They do not offer shipping services themselves. On the other hand, freight forwarders are involved in the entire process. They create plans with their clients of how the freight should be handled and transport the products with their business's resources or the resources of a carrier they work with.
Freight brokers also do not handle international shipments. Freight forwarders are licensed to do so because the FMCSA governs them. Therefore, freight forwarders have a greater variety of locations they can ship freight to.
When deciding whether to become a freight forwarder or a freight broker, clearly understanding each job's legal responsibilities is essential. Freight brokers are not legally responsible for the freight because they never have physical possession. On the other hand, freight forwarders are legally responsible for the storage, shipment, and delivery of the freight once they come into physical possession. Therefore, freight forwarders have stricter licensing and insurance requirements. We will go into more detail about these requirements in the sections below.
To become a freight forwarder, follow this 5-step guide below:
The first step is registering your business in the state, city, or county where your official address is located. To start the process, you must first choose what kind of business type you are. Most freight forwarding companies are one of these four business structures:
Limited Liability Company (LLC): An LLC, short for Limited Liability Company, represents a business arrangement that grants its proprietors limited liability protection, ensuring their assets are safeguarded. This structure also offers versatility in both management approaches and taxation procedures.
Sole Proprietorship: A sole proprietorship designates an unincorporated enterprise possessed and managed by an individual singularly. This configuration renders the individual personally answerable for all the monetary commitments and responsibilities of the enterprise.
Partnership: A partnership embodies a business format wherein two or more individuals or entities collaborate to possess and run an enterprise collectively. This cooperative arrangement involves the sharing of profits, losses, and obligations.
Corporation: A corporation stands as a distinct legal entity apart from its proprietors (shareholders) endowed with limited liability privileges. Its primary objectives encompass engaging in business operations, releasing shares, and distributing earnings.
You must register your business with your local jurisdiction if you are a partnership or sole proprietorship. Visit your city or county's official website to find instructions for registration. You must register with your state government if you are an LLC or corporation. Visit your state's official website for further instructions on registering your freight forwarding company.
There are four modes of transportation for freight forwarders. Each has a slightly varied licensing process:
A USDOT number is an identifier of the company for collecting and monitoring a company's safety information. You only need this number if you want to be a carrier.
Whether you want to be a carrier or not, you must obtain the Freight Forwarder Authority. The Freight Forwarder Authority is the license freight forwarders must obtain to start their business. There are two different licenses to choose for freight forwarding: (1) property and (2) household goods.
Freight forwarders of property arrange interstate and foreign transportation of products belonging to others.
Freight forwarders of household goods have the same authority, except they are specifically responsible for household goods like unaccompanied baggage, used automobiles, and many more.
If you are a trucking and road freight forwarder, you are licensed under the FMCSA. You must complete the OP-1 (FF) form to apply for authority. You can have the option to apply online OR apply via mail by downloading the appropriate forms and sending them to one of the following addresses depending on your payment method:
If you are an ocean freight forwarder, you are licensed under the FMC. You can only apply for this license online. You can see an example of the application on the FMC official website. In the application, you will be asked about the following:
Air freight forwarders do not require a license in order to operate and provide their services within the realm of facilitating the transportation of goods via air, as their industry involvement does not necessitate regulatory licensure under current norms and standards.
It will take a few days for your application to be processed. Once approved, a grant letter will be sent to you via email or mail. There you will be requested to submit your insurance and bond information.
The following insurance and bonds are required for your freight forwarder license:
Once you have obtained your insurance and surety bond, your insurance or surety companies must request the filing form via the email email@example.com. The email should include the following information:
Once your forms are filed, you will receive confirmation that all license requirements have been fulfilled, and you will receive your license either by mail or email.
Becoming a freight broker requires similar steps. Below, you will find a step-by-step guide:
The first step is to complete freight broker training. Freight broker training teaches applicants the basics of freight brokerage, like laws you must abide by. Every state has its broker training schools. Be sure to find a school approved by your state government to complete this requirement. Below are some of the best freight broker training programs:
Location: Online or In-person in the following cities:
Cost: $799 to $1999
Location: Online or In-person in the following cities:
Cost: $124 to $774
Location: Online or In-person in the following cities:
The next step is to choose your business type and register your business. As a freight broker, you also have the choice to be a sole proprietorship, partnership, LLC, or corporation.
Sole proprietorships offer simplified management and direct control but can lack access to resources and face unlimited personal liability.
Partnerships provide shared decision-making and resource pooling, yet they may involve disagreements and expose partners to shared liabilities.
Limited Liability Companies (LLCs) offer liability protection for members and flexible taxation, although they require formalities and can have limited life span.
Corporations provide limited liability for shareholders and access to capital markets, but involve complex regulations and potential double taxation.
You must file your business name with your local government as a sole proprietorship or partnership. As an LLC or corporation, you must file your Articles of Organization or Articles of Incorporation, respectively, with your state government.
You can begin fulfilling licensing requirements once you've completed your training and registered your business. Like freight forwarders, you must also apply for the USDOT number with your state's Department of Transportation. You must also fill out the OP-1 FMCSA form. You will follow the same process as freight forwarders when submitting this application.
The USDOT number functions as an identifier for companies, aiding in the collection and monitoring of safety information, and it's mandatory only for those seeking carrier status.
Obtaining Freight Forwarder Authority is also a requirement; this license application is essential for commencing freight broker operations. Where you submit the application depends on your payment method:
Once you've submitted your application, you will receive a letter via mail or email prompting you to submit your insurance and bond information. The following insurance and bonds are required for freight brokers:
Once these required documents are submitted, you will be a licensed freight broker.
You must obtain a $75,000 BMC-84 freight broker bond for both the freight broker and freight forwarder license.
The BMC-84 bond is a way to protect carriers and shippers from potential financial harm caused by the actions of a broker or forwarder. If the broker or forwarder fails to meet their contractual obligations, carriers and shippers can file a claim against the bond to seek compensation.