Working as a freight broker can be incredibly profitable in today’s economy. A massive trucking shortage coupled with a high demand for trucking services provides entrepreneurs a great opportunity to dive into the industry that moves 70% of the nation’s freight and garners over $700 billion in revenue. Consequently, you’ve decided to try your hand at starting your own freight brokerage—now what?
Well, one of the most important steps to starting a freight brokerage company is obtaining a freight broker bond. Check out the guide below to get all of the information that you need about surety bonds for freight brokers, the application process and freight broker bond costs.
What is a Freight Broker Bond?
A freight broker bond is a bit complicated to explain. Essentially, it is an agreement between three parties (you, the government and a bond agency) that more or less acts as insurance for your customers. Freight broker bonds are a type of surety bond, which, broadly speaking, guarantee the fulfillment of specified tasks—sound vague?
It is a rather tough concept to comprehend at first. Let’s take a look at how freight broker surety bonds work:
You, the budding freight broker (technically known as the “principal, in bond jargon) are legally required to have a “just-in-case fund” that you can dip into if you become unable to honor contracts and pay truck drivers or deliver loads for clients. The Federal Motor Carrier Safety Association (or FMCSA, technically referred to as “the obligee” of the bond agreement) will not let you operate without a surety bond for freight brokers— after all, if you renege on your agreement, the shipper doesn’t get his/her goods delivered and truckers may not get paid.
Such situations would hurt two parties in the supply chain, and if like situations occurred too frequently, the economy would become volatile. So, you (the principal) have to contact a bond agency (or “surety”) that will offer you a bond that will protect your truckers and shippers from mishaps. If for whatever reason, you don’t see to it that a client’s freight is hauled or you don’t pay your truckers, they can file a claim against your bond. When a company or driver does this, the surety/bond agency pays what is owed, while you subsequently repay the bond company.
Think of it as insurance for the people with which you will do business—if, for whatever reason, you can’t make good on your brokering deal, your customers and truckers will be protected and receive payment anyway. From there, you will have to settle the score with your surety agent. But, the bond lets you broker deals with some peace of mind that your business partners will not make a bad investment in you.
How to Get a Freight Broker Bond
So what are the freight broker bond requirements? There are three things that brokers must obtain before they can qualify for a freight broker surety bond:
- An operating authority from the FMCSA
- Public liability insurance
- A BOC-3 form from the FMCSA
As you obtain your FMCSA operating authority, you will also have to get your public liability insurance—so those steps are nearly one in the same. After you register as a federally-approved process agent, you are free to contact a surety bond company and apply for a freight broker bond.
When you apply for a bond, the surety company will take your credit score and give you a quote. The better your credit score, the lower the bond company will charge you each year for their services. But, if you have bad credit, don’t worry—many bond companies will still work with you. It will just be more expensive.
Types of Freight Broker Surety Bonds
As you begin researching bond companies to work with, you will quickly come across two recurring terms—BMC-84 and BMC-85. Both are financial agreements that the FMCSA approves for brokers, but what is the difference between the two?
The BMC-84 bond acts as a form of credit for you, the freight broker, and protects customers and trucking companies from potential losses if you violate FMCSA regulations. As the MAP-21 law mandates, the bond insures your affiliates up to $75,000 in damages if they make successful claims against you. In this agreement, the bond company charges you a small percentage of the bond’s total value ($75,000) each year. The next section of this article will delve more into the costs of a freight broker bond.
BMC-85 Trust Fund
This option is typically undertaken by large firms or established brokers. In a BMC-85 trust fund arrangement, the broker fully-funds the government-mandated $75,000 into a bank account and cannot touch it thereafter.
How Much Does a Freight Broker Bond Cost?
The cost of a freight broker bond varies between applicants and program type. If you have the capital to apply for the BMC-85 trust fund, then you will obviously need to have $75,000 in capital ready to place in a bank account. From there, you will have to pay some bank fees.
But the BMC-85 option isn’t practical for new freight brokers. So, more than likely, you will be paying for the BMC-84 bond. Bond companies offer different rates for BMC-84 bonds, but you can expect to pay between $900 and $2,000 annually for the bond. Whether you pay closer to $900 or $2,000 depends on your personal credit history. J.W. Surety Bonds, one of the nation’s larger freight broker bond companies, has an online cost calculator that you can use to get a picture of how much it’ll cost you.
Securing a freight broker surety bond is a necessary step in starting your own freight brokerage. Having a bond lends credibility to your business and ensures that you are a safe player in the transportation market.
We hope this guide was helpful in answering your questions about obtaining your freight broker bond, and if you need assistance managing your cash flow once your brokerage is up-and-running, give us a call or request a free quote.