Think you know how to start a logistics company? You may have several years of experience at a large 3PL. Breaking out on your own seems easy. You just need a phone, two (or three) computer screens and your carrier relationships, right? Understanding how to start a logistics company is a lot easier than the execution though. There are 5 factors that are essential to consider before making the jump.
After several years, maybe even an entire decade of running your own group at a major 3PL doing thousands of load per day, you may think to yourself: “I know how to start a logistics company. I certainly know how to move freight. Hell, my group moved 150 loads just yesterday. Why don’t I start my own logistics company?”. Hold your horses there, cowboy. You have the right attitude, yes. But understanding how to start a logistics company isn’t as simple as brazenly charging ahead, phone, computer and two monitors in tow.
How to start a logistics company: legal issues
You may feel like you’re ready to march out that door, like it’s a movie or something. But legally, can you even call the carriers or customers you currently work with? Or did you sign a two-year noncompete that would prohibit you from working with all those great people whom you’ve built great relationships with? How you’ll take your existing relationships into your new business venture can be very complicated. Be sure to secure all documentation you signed before starting at the company and review with a practicing attorney before starting any new business relationships. If you’re starting from total scratch, a simple way to get off on the right foot is to use 3PL software to simplify the management of your freight.
This is all not to mention that it’s in your best interest to register your company as a legal entity, a corporation, LLC, S-corp or otherwise. Forming a real company will serve as the basis for you to do everything legally and correctly.
“Before starting a logistics company, do your homework. Work out how you will build a sustainable business. Seek out customers and contracts BEFORE you start the business because transport contracts don’t magically appear later on.”
How to start a logistics company: get insurance
After setting up your business as an official legal entity, you next need to consider protecting yourself. Running a logistics company can be risky. For example, if you broker a load and the drive is involved in an accident which results in loss of the products, or worse, loss of life, your logistics company could be responsible. For total piece of mind, consult with an attorney to determine exact requirements for operation in your state.
Develop a business plan
“But I already know the business inside and out!” you say. That may be true, but, putting time into thinking about every. single. aspect. of your business will force you to uncover hidden obstacles you may not have considered otherwise.
Writing out your exact plan will help you uncover areas of your business that you may have overlooked. It will also help you flesh out the details of how you would secure funding so solve your early cash flow needs. Are you going to self-finance everything you need to get started? It can be done, but growth will likely be slower than if you take out a business loan from the bank.
But, keep in mind, it’s not uncommon for new logistics companies to need a line of credit in the amount of $250,000 – $300,000 in order to pay carriers before they can get paid by the shipper. You’ll want to develop a good relationship with your bank or banker, and show that you have excellent credit. Why? Because your business does not have any assets for for the bank to come after should you default on your loan(s).
Record keeping requirements
Keeping records of everything you do is every important, The code of Federal Regulations is very specific about the type of information you need to keep track of. You should keep a master list of all your shippers and carriers, but more specifically, a record of each transaction. This is where easy-to-use 3PL Software is critical to your success.
Your records must show:
- The name and address of the consignor (shipper);
- Name, address and registration number of the motor carrier;
- Bill of lading of freight bill number;
- Amount of compensation received by the broker for the brokerage service and the name of the payer;
- a description of any non-brokerage service performed in connection with each shipment, 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 by the carrier
You have to keep these records for three years, and any party involved, shipper, carrier or otherwise, has a right to inspect those records. So, be prepared to cross all your Ts and dot all your Is. Good record keeping is important, and from the beginning you’ll want to be sure and use a 3PL software that is capable of tracking all this important information.
How to start a logistics company: finding an office location
When you’re just figuring out how to start a logistics company, it’s important that you secure a big fancy office space in a prime downtown location. Just kidding. That’s not really important at all when you’re starting out. One of the primary benefits of starting a logistics company is the fact that you can work out of your home when you’re just starting out. It’s definitely to your benefit to do so, as the cash you would put towards renting an office space could very easily be put to good use elsewhere. Once you’ve built up some steady clients after 2-3 months and have made a little money, consider finding a place where you and another person can conduct your business.
Consider renting from a co-working space Like WeWork or Industrious. In these types of environments, you can easily expand the amount of space you have from 1-10 employees without having to move buildings. Not only that, but you’ll meet other people who can, who knows, refer you to their cousin who’s a shipping manager for Kimberly Clark. This can be ideal, since you will want to have built up some cash in the bank before making the jump to that leased space where you can feel comfortable committing a large lease payment every month.
Understanding how to price your services
It should go without saying that you need to charge the shipper more than you pay the carrier for your logistics business to grow over time. That’s how businesses work. But who’s going to be responsible for managing pricing? Who understands the market and can account for the way seasonal transport changes rates? Hopefully you have experience and know the markets, but if not, consider trying to bring on someone with 10+ years of experience and ideally someone who has managed a carrier sales team at a large 3PL. Hey, who else is going to tell you that “It’s turkey season in Arkansas”, which is contributing to higher prices and tighter demand in southern states in August and September? That experience, and those carrier relationships can be invaluable.
Before you set your prices, you should build out a budget that examines your costs. Here’s an example:
Professional equipment (computer and monitors): $4,000
Licenses/tax deposits: $250-$600
Professional services: $400-$850
Insurance (first quarter): $700-$1,400
Suggested operating capital: $5,000-$450,000 (cash or line of credit), depending on how many carriers you’re on the hook for paying.
Developing a go-to market strategy
Once you’re out on your own, how do you plan to acquire customers? Understanding how to start a logistics company is going to take more than simply looking up any company at all that might ship freight. It’s not going to be practical to just start calling companies with no plan. Think strategically, and consider the following questions:
- Who are my potential customers?
- How many of them are there in the market?
- Where are they located?
- How do they currently transport freight?
- Can you offer them something that they are not getting currently?
- Will you need to say to persuade them to do business with you?
- What are the services you offer?
- How are you different from the competition?
How to start a logistics company: securing your first contracts
This is the part of understanding how to start a logistics company where experience will play the largest role: securing those all-important contracts for business. How to start? Rome wasn’t built in a day, and neither was your logistics business. You may want to start small, as in with one or two loads. Who is a shipper that doesn’t have a ton of freight but whom you could possibly get 1-2 loads from?
You may want to start by placing some prospective calls to carriers, first. Does a particular carrier have capacity to take a load from Berne, IN to Chicago, IL? If they say, yes, probably, you can now approach a shipper and let them know that you’re there for them if they need them.
Try focusing in on a select group of shippers, first. Don’t go for Kimberly Clark right off the bat; every logistics company in the world wants to move truckload after truckload of toilet paper. Maybe consider a party supply store that deals with an enormous spike in loads leading into the Halloween season? Try making small talk with the shipper when you do get them on the phone. This is still a people business, and the shippers who will eventually sign that contract with you have to like you first. If a shipper mentions their kids like playing sports, pay attention to that. When its appropriate (a judgement call on your part), ask how baseball season is going for little Johnny. Make careful notes of this in your 3PL software and you can reference.
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