The importance Of Freight Broker Bonds For Your Business

What You Should Know About the Importance of Freight Broker Bonds

The role of freight brokers within the transportation industry is critical. As a freight broker, you are tasked with connecting shippers with trucking companies so that your goods can be delivered on time. Freight brokers help to identify transportation companies that are equipped to handle various types of loads at affordable rates. Many shipping companies rely on freight brokers for greater flexibility, lower costs, and better delivery speeds.

If you want to operate a freight brokerage, you must obtain a license to operate from the Federal Motor Carrier Safety Administration (FMCSA). Under FMSCA regulations, one of the licensing requirements is a freight broker bond. Before you can be granted operating authority from the FMCSA, you must be bonded and meet other requirements. Here is what you need to know about the importance of freight broker bonds for your business.

What Is A Freight Broker Bond?

A freight broker bond or BMC-84 bond is a legal agreement involving three parties that serves as a guarantee that you will comply with the FMCSA's regulations and other laws and will conduct your business in an ethical manner. You will not be protected against liability by your freight broker bond since it is not a type of insurance. BMC-84 bonds are a form of credit extended by a surety company that allows freight brokers to meet their regulatory licensing requirements and protects the government and the companies that contract with the freight brokers against fraud, misconduct, and violations of the law.

The following three parties are involved in a freight broker bond:

• Principal - The freight broker that needs the BMC-84 bond
• Obligee - The FMCSA that requires the bond
• Surety - The bond company that issues the bond

If you break the law, engage in malfeasance, or fail to fulfill your obligations under a contract, a bond claim can be filed by the harmed party or the government against your bond. The surety company will pay valid bond claims up to the face value of the bond.

However, you will be legally required to repay the surety for all amounts paid on your behalf in full. If you fail to do so, the surety company can enforce the bond requirements by filing a lawsuit against you, and you will then be responsible for paying both the amounts the surety paid as well as the surety's legal fees. Unpaid bond claims can cause you to lose your bond and your license and force the closure of your business.

If you fail to pay a trucking company the money it is owed for transporting and delivering a shipment, the company can file a claim against your bond for the amount you owe for its transportation services. Even if you repay your surety for valid bond claims, having a history of claims can make it harder for you to renew your bond or secure a new one. If you are approved for a bond after having a history of claims, you will likely have to pay high rates because of your level of risk.

Why Freight Broker Bonds Are Required

Under FMCSA regulations, all freight brokers must secure licenses to operate legally within the U.S. and must renew them each year. As a condition of getting a license, you must either purchase a $75,000 BMC-84 bond or place $75,000 in a BMC-85 trust. Most brokers choose to purchase freight broker bonds instead of opening BMC-85 trusts because they can pay a percentage of the total required bond amount instead of having to tie up $75,000 in a trust that they can't touch.

Freight broker bonds are required to protect shippers and carriers that rely on brokers. If you don't purchase and maintain your freight broker bond, you won't be able to obtain operating authority through a license and will not be allowed to operate your company.

What Is the Bonding Process For Freight Broker Bonds?

To get a freight broker bond, you must submit an application through a surety company that issues BMC-84 bonds. Before you will be approved for a bond, your application will be sent through an underwriting process to assess your risk. The surety will want to learn about your personal and business credit, your business's financial stability, whether you have enough capital available to cover potential bond claims that might be filed, and whether you have had problems in the past.

If you have an excellent credit score, strong business financials, and a strong history, your application will likely be approved at a low bond premium rate. By contrast, if you have poor credit, marks on your record, and spotty financials, your application might be denied. If you are approved with a problematic record, you can anticipate having to pay a high percentage of the total bond amount to secure your bond. The bond premium is what you have to pay to purchase the surety bond, and it will range from 1% if you have excellent credit to as high as 15% if you have poor credit or other issues in your past.

Once you obtain a freight broker bond, it will not be permanent. Bonds expire and must be renewed. You will also have to renew your license with the FMCSA each year, so you will need to pay attention to the expiration date of your BMC-84 bond and apply to renew it on time so that it doesn't expire. If it does, your license to operate your company could be suspended.

While your freight broker bond won't protect you from liability, you must purchase one if you want to operate a freight brokerage and don't want to deposit $75,000 in a BMC-85 trust. You won't be allowed to secure a license from the FMCSA without either posting a freight broker bond or opening a BMC-85 trust in the amount of $75,000. Once you purchase your bond and get your operating authority, make sure that you adhere to all regulatory requirements and conduct your business ethically. If you fail to meet your legal and ethical obligations, you could lose your bond, your license, and your ability to run your company.