Freight Forwarding Business: Risk Factors to Consider Before Investing

Freight Forwarding Business

A freight forwarder is an agent who arranges the shipment and reception of goods from a seller to the buyer. It is regardless of the mode of transport, be it air, sea, or road.

The freight forwarding business is quite lucrative and estimated worth in 2018 was approximately twenty trillion and is expected to continue growing, making it a worthy and profitable investment. The business is, however, faced with risks you must be willing to come to terms with before making the investments. Such risks can quickly turn your investment into losses.

Losses from Delayed Shipments

Delays happen all the time, but they are a big problem to have in the freight industry. Most delays in cargo deliveries are due to incorrect filling of documentation by freight forwarders. There are also delays caused by poor weather conditions and delayed approvals at customs.

Such delays cost the business, as the freight forwarder takes responsibility for unplanned storage, which may be very expensive to account for. Many consumers also lose confidence in the specific freight forwarder, which affects the business profits for the future.

However, it helps if the freight forward can communicate to the seller and buyer about the delayed shipment with a valid reason.

Shipment Abandonment

It occurs in various forms; the recipient could have canceled the order as it was in transit or refused to receive it once it arrived. The latter is usually due to a lack of funds to get their order released to them.

This issue may set the freight forwarder back monetarily, which in most cases, is not refundable. For this risk, freight forwarders usually have terms of service applicable before the order is shipped that deem some form of payment before shipment of the product. They also have insurance for such risks, guaranteeing payment even after the order is canceled.

Fraud

The risk of fraud is always an imminent factor that many investors learn from the hard way. Many freight forwarders have made significant losses due to not being careful with the contracts they sometimes engage in and the lack of proper vetting of employees they hire to facilitate their services.

Some contractors are usually fraudsters who work with employees to make financial invoices for services that have not been delivered. Technology has, however, come to their aid, being able to keep track of activities.

It is, however, different from proper background checks on the shipping companies they work with and their employees. For instance, the shipment company has a license of the FMC bond when the mode of transport is water.

Semi-annual audits are crucial to ensure all funds are correctly used and systems are improved to prove against fraud.

Lost or Damaged Cargo

Damages to a shipment typically occur during transit. The packaging could be poorly done, The container with the cargo could be damaged, or there could be mishandling during the transit time. Damages also occur in bad weather.

If the freight forward is found guilty of poor packaging, mismanagement, and neglect, he will be required to pay for the losses made and replace the item. It is a heavy burden to bear, considering the number of goods that arrive damaged at their destinations. You can protect your freight business by taking out insurance on the cargo, which is quite expensive but essential.

Bankruptcy

Bankruptcy is a real issue faced by freight forwarders. As the business requires a lot of startup capital, most business owners opt to source capital from creditors such as banks, who will require payment as agreed upon.

Regardless of the challenges, getting the payment done may be challenging. These challenges include losses due to lost or damaged goods, cancellation of orders while goods are still in transit, and loss of customers for various reasons.

Mismanagement of Finances

A freight forwarder can sustain his business by setting up solid systems to cut losses and account for every penny. Many of them, however, need to gain more knowledge of such systems, which leads to the misappropriation of funds crucial to running the business.

As an investor, you will not likely be managing the business employees, which may be another leak for imprudent employees to steal.

The freight forwarders should be able to leverage risks such as lost and damaged shipments, delays, and neglect. It would be best to take a short business management course and research the current systems to prevent misappropriation. Schedule appointments with freight forwarding investors willing to provide valuable information to help find solutions to this risk.

Incorrect Shipment Billing

If the consumer paid for a cheaper shipping method, but the freight forwarder happened to bill it to a more expensive party. If you are that lucky customer, then hooray! For the freight forwarder, however, he will have to bear the brunt of their actions, going back into his pocket, which is bad for business.

It applies to a consignee who paid for the higher shipment fee, but the shipment was billed for a much lower cost. The freight forwarder will have to refund some of the cash to the consignee.

Incorrect Addresses

Incorrect addresses could originate from any angle. The consumer when making the purchase, the seller during packaging, or the freight forwarder when making the shipment. This risk is real and happens all the time.

It is excruciating if the mistake is on the freight forwarder, who has to pay the extra cost of delivering to the correct address. As a result, the agent is highly likely to lose customers, which is a loss to the business.

The freight forwarder must therefore confirm the information given by the consumer to prevent shipping to the incorrect address. If the issue was not on the agent, the consumer must pay for further costs that will be incurred.

Final Thoughts

The risks mentioned above are only a tiny portion of the risks faced by a freight forward business. It is crucial to consider them when considering whether to invest in the industry.

However, the risks are manageable with methods such as insurance policies, regular communication with the consumer, and a thorough background check on potential employees. There are many management methods, however, especially with technological advancements.

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