Although many companies in the U.S have contracts with trucking companies to transport their goods, a significant proportion of freight transport is handled by brokers. Regulated by each state, freight brokers act as intermediaries between the shippers who wish to transport their goods and the trucking companies that offer freight shipping services. The brokers handle the entire shipping process, including any documentation involved, and make sure that the freight is delivered to the shipper.
Now, when a middleman is involved in the freight transportation process, there is no guarantee that they won’t act against the interest of the client. The broker can engage in fraudulent acts which would cause the shipper to lose their shipment. To avoid such cases, all freight brokers are required to carry broker bonds transportation insurance. This is a form of insurance that protects the shipper form any illegal, fraudulent, or unethical activity by the broker.
Besides obtaining a license, all freight brokers are required to carry broker bond insurance or freight broker bond. The guarantee does not cover the broker; instead, it covers the client who will seek the broker’s services when shipping their goods. This price will provide a detailed guide into broker bonds insurance, what it entails, what brokers need to apply for the bond, and other useful tips for freight brokers.
Freight Broker Bond Explained
A freight broker bond is often required of brokerage businesses that intend to offer freight transportation services. The government body that needs freight brokers to carry the surety bond is the FMCSA. The bond protects motor carriers and individuals or companies that employ the services of the broker. Freight broker bond is a form of assurance that the broker will operate according to the agreement with the motor carriers and shippers. There are three parties to freight broker bonds agreement, and these are:
• The principal who is the freight broker
• The oblige who is the party requiring the bond (the FMCSA)
• Surety which is the surety company
If a broker doesn’t adhere to the terms of the contract, the shipper or motor carrier can file a claim and pursue compensation for losses or damages incurred as a result of the broker’s fraudulent or negligent acts.
FMSCA Freight Bond Requirements
The FMCSA requires the freight broker bond (BMC-84) to be in the amount of $75,000 for the one year term. This amount was initially $10,000, but it was increased in 2012 after the FMCSA established that there were many instances when shippers and carriers were being delayed and denied payment.
It is important to note that the BMC-84 Freight Broker Surety Bond is not a form of insurance. When an individual files a claim on a surety bond, the surety company (the third party in the agreement as mentioned above) has to pay out a loss. Therefore, the freight broker is required to provide full reimbursement to the surety company as stated in the indemnity agreement signed by the broker. The surety bond does not insure the freight broker.
Cost of Freight Broker Bond
The cost of freight broker bond varies depending on the rate. Bond rates depend on the qualification of the bond applicant. These rates are determined based on a few factors such as financial standing and credit rating. Annual premiums for the $75,000 BMC-84 bond are currently between $1,300 and $9,000. For brokers with a bad credit score, the freight broker bond cost will typically be higher due to the risk attached to bad credit applicants. For example, a broker with a good credit rating may incur a cost of around $1,500 to 3750. On the other hand, a bad credit score will attract a cost of $4500 to $9000.
For one to know the cost of the bond, they have to make an application and let the underwriter review the request. After this, they will generate a quote based on the determined rate and send it to the applicant.
Freight Broker Bond Application
Since there are standard freight bond amounts and an electronic application method, there are no special requirements for applying. The surety bond agency helps with the entire process, and these are the necessary steps to make the application.
1. Fill out the form and attach the required documents. One requirement may include a financial statement. However, this isn’t always the case, and the agent can advise whether to provide it or not.
2. The application is sent to the underwriter who reviews the request and generates a quote. Usually, this can be done within 24 hours.
3. After receiving the quote, one is required to pay the premium, receive the MC number, and their FMCSA Freight Broker Surety Bond will be set up.
How to Lower Your Freight Broker Bond Cost
As aforementioned, one’s credit rating can significantly hike the bond premiums. Therefore, brokers who have a poor credit rating can take certain measures to lower the freight broker bond cost. Some of the measures include the following:
• Provide strong financial statements. Even with a bad score, proof that one is financially capable of fully reimbursing the surety company can significantly lower the bond cost.
• Improve the credit score through steps such as taking care of negative items listed on the credit history. These include civil judgments, liens, tickets, or even unpaid child support.
• Choose the right surety bond agency. A surety agency can work to give you the best rate possible. Also, a good company that only works with top surety companies can assure that one has good backing for their bond.
Working as a freight broker requires that one get a broker’s license and acquire a freight broker bond from the FMCSA. One cannot operate legally in any state without these requirements. However, while the FMCSA broker bonds amount is fixed, the premiums aren’t. One’s financial standing and credit score play a significant role in determining their annual premiums. Therefore, it is essential to not only work towards building an excellent credit rating but also to find a good surety bond agency that works tirelessly to ensure that they get the best rates for freight brokers.