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Freight Broker Bonds, Explained

May 25, 2016 at 08:12 AM CST
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As a freight broker, you have to take care of a pile of paperwork. Most of it is connected with obtaining a freight broker license from the Federal Motor Carrier Safety Administration so that you can run your freight brokerage legally.

Needless to say, taking care of administrative issues is not that exciting, but in fact, the process can get easier if you are well acquainted with what’s expected from you. That’s why it’s worth learning the basics about freight broker bonds.

The bonds are one of the most important requirements that brokers need to meet so that they are granted their licenses. Their goal is to guarantee the legal compliance of brokers and freight agents.

Let’s look at the significant aspects of freight broker bonds that you need to keep in mind so that you can run a successful freight broker business.

What exactly are freight broker bonds?
Freight broker bonds are required by the FMCSA as an additional security. Without posting them, brokers cannot obtain and renew their freight broker license, which means they cannot do business legally.

The purpose of a bond is to safeguard the interests of motor carriers and shippers, as well as any other parties toward whom brokers have obligations. If a broker fails to pay or delays payments, the affected parties can demand for a compensation via a bond claim.

Just like other types of surety bonds, freight broker bonds are a contractual agreement between three parties. A surety backs up your brokerage in front of the FMCSA by guaranteeing you will stick to the rules of the trade. In this sense, bonds are a strong sign of the financial responsibility of a broker, as well as of its trustworthiness. Besides being required for legal operation, bonds are a reputation booster for individual freight broker agents and the industry as a whole.

Freight broker bond cost explained
The FMCSA requires all freight brokers and freight forwarders to post a $75,000 BMC-84 surety bond. The bond amount was increased in 2013 from $10,000 after the MAP 21 legislation was enacted.

The financial burden of getting bonded is a common worry for brokers. But the freight broker bond cost, in fact, is only a fraction of the $75,000 bond amount that is required. The typical percentages are in the range of 2-5 percent for the standard bonding market and 6-13 percent for brokers with bad credit. This means that if your finances are in good shape and you have some experience in the business, your bond premium can be as low as $1,500 per year. You can lower your bond cost by showcasing your assets and liquidity and by improving your credit.

There are bonding options if your finances are not that perfect too. The premiums range from $4,500 to $9,750 per year, depending on your credit score and professional knowhow.

Bond claims and how to avoid them
As the purpose of freight broker bonds is to protect parties that brokers do business with, bond claims do happen in the industry. It is important to understand how they work and why it is so important to avoid them.

If brokers delay or fail to complete due payments to shippers and carriers, they can file a claim against the freight broker bond. An investigation is the launched in order to establish whether there is a breach of the bond contract. In case the claim is proven and the broker does owe money to the affected parties, they can receive a reimbursement up to the bond amount, which is the penal sum of the bond.

This can be a serious financial setback for the broker. Besides providing the financial compensation, there is another complication that follows from claims. It is often difficult to get bonded after a proven claim, which means that a broker might stay out of business because it cannot fulfill this licensing requirement. That’s why claims are highly undesirable.

The goal of freight broker bonds is to ensure that brokering is an ethical and fair industry where people receive rightful payment for their work. At the same time, they are a positive sign for bonded brokers that communicates the brokers are safe to do business with. Getting to know the basics about bonds will help you obtain the bond you need at the best price, as well as avoid unnecessary trouble with bond claims.

What is your experience with freight broker bonds? Do you have any special tips to share? We’d love to hear from you in the comments below.

Author: Vic Lance

Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps freight brokers get licensed and bonded. Lance graduated from Villanova University with a degree in business administration and holds a Master’s i

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