A freight broker surety bond is a legal agreement in the shipping world. It makes sure that freight brokers are doing their jobs correctly. That means if they make a mistake or don’t pay their bills, this surety bond helps cover the costs.
In this article, we’ll explain the working of these bonds, application process and estimated costs.
Defining The Freight Broker Surety Bond
The freight broker bond is a type of financial agreement that ensures carriers and shippers about their payment from freight brokers. The bond is mandatory for freight forwarders and brokers before attaining a broker authority license from the Federal Motor Carrier Safety Administration (FMCSA).
There are also other names for the bond. These are:
- BMC-84 Surety Bond (BMC refers to the Bureau of Motor Carriers)
- Transportation Broker Bond
- Property Broker Surety Bond
- Interstate Commerce Commission (ICC) Bond
Why Do You Need a Freight Broker Bond?
The BMC-84 Broker Bond protects freight carriers and shippers from financial loss. It assures timely clearance and saves you from fake brokers. Being a broker, you must comply with the FMCSA rules and regulations.
If the broker cannot follow these regulations and causes monetary injuries to shippers or carriers, they can claim a bond against forwarders or brokers for their losses. As a result, you have to pay the total bond amount, which is $75,000.
This type of compensation could potentially damage the brokerage authority in terms of cost and credibility.
Working Principle of Freight Broker Bond
Freight brokers are individuals or companies that connect shippers with carriers. The shippers are those who manufacture the products, package and label them, and make them ready for transportation. They contact freight brokers to find the best and most economical way of shipping the products.
The brokers find carriers who are responsible for transporting goods from one place to another via ships, planes, or trucks. The brokers negotiate shipment prices and manage other details. They play an important role in the supply chain by connecting both shippers and carriers.
Parties Involved In Surety Agreement
The involvement of the following three contributors is required for the agreement and further responsibility of the surety bond. These are:
- Principal who is the freight broker or freight forwarder.
- Surety refers to the bond company that provides the bond.
- The obligee which is the Federal Motor Carrier Safety Administration (FMCSA).
How Surety Bond Works?
The surety bond is applied to the principal (broker) if he fails to pay for the services. If the claimant claims the surety bond on the principal, firstly it is necessary to discuss the issue with the claimant to resolve it without the interference of the surety.
If the issue is not resolved, then the principal needs to contact the surety agent to find further details about the claim. The FMCSA also investigates the process to ensure the claimant’s satisfaction. The broker must pay for the compensation if the claim is legitimate according to the surety agreement.
If somehow the principal is unable to pay for the compensation amount, then the surety company takes charge of it and pays the bond amount to the shippers or carriers. Now, the principal is responsible for paying the bond amount to the bond company.
Types of Bonds
It is required to buy a surety bond whether you have a small freight broker business or you are an established freight broker. There are 2 types of bonds to meet the requirements of both. Let’s discuss them:
- BMC-85
If you’re able to pay the whole bond amount at once, then BMC-85 is the right choice for you. According to the agreement, if you choose BMC-85, you have to submit $75,000 into a custodial account (trust fund). It will confirm that the principal has funds to compensate for any financial claim.
- BMC-84
If you are a beginner freight broker and unable to pay the whole amount at a time, then choosing the BMC-84 option is best for you. It is more economical as it requires paying a small upfront and then the percentage of the compensation amount every month. These monthly payments are called premiums.
If something goes wrong and a claim is made then the full bond amount is covered by the bond company.
Points To Be Noted
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How To Apply For Freight Broker Bond?
Before applying for a surety bond, you have to register with FMCSA to get the freight brokerage authority. After that, find a reliable bond agent or company to apply for the freight broker bond. Let’s see the steps for the bond application:
- Apply via an online portal by filling out the application form with the required information about your company.
- The agent will contact you to do a brief analysis of your financial conditions. They will tell you if they need further documents.
- Now the company will send you a quote according to your business details. If you are ready then the further process starts of getting the bond approval.
- If your bond is approved, then you are required to pay for your bond premium.
- After the payment has been made for the bond premium, your bond will be registered.
- After registration, the coverage becomes active on the FMCSA website.
Documents Required
The following documents are required to get the freight broker bond.
- Application Form
- Contact Information
- Ownership Documents
- Business Financial Reports
- Insurance Proof
- Social Security Numbers (SSN)
How Costly Is It To Get a Freight Broker Bond?
The price of the freight broker bond, which is 1.5% to 12% of the total amount of the bond, can be decided by several factors. These are:
- Years in business
- Business credit score
- Company’s financial Reports
- Personal credit rating
- Your assets
These factors basically decide the financial circumstances of the broker. Depending on these aspects, the freight brokers and their prices are divided into 2 categories.
- The price of the bond for new brokers ranges between $1,500 – $9,000. This amount is also for those individuals or businesses who have low credit scores.
- If you are an experienced broker with a great credit score, then the annual premium bond amount is between $938 and $6,000.
The bond amount is high for new businesses due to risk factors.
FAQs
What Are The Requirements To Apply For a Freight Broker Bond?
There are different requirements for each of the bond surety companies. The most common requirement is your financial statement which includes income reports, cash flow statements, bank statements, equity changes reports, bank balances, expense reports, etc.
The other requirements may include your Motor Carrier (MC) Number, current claims, contact information (email or phone number), business ownership documents, valid insurance proof, years of experience in business, company information, residency details, and filled bond application form.
What Is The Responsibility of a Freight Broker?
The primary responsibility of a freight broker is to create a link between shippers and carriers and maintain it with clear communication and a smooth working process. They are responsible for:
- Discussing the price with carriers for shipping goods
- Quotes preparation
- Tracking transported shipments
- Assuring on-time delivery of shipments
- Fix issues that arise during the shipment process
What Is The Use of a Freight Broker Bond?
The freight broker bond ensures that the broker follows the FMCSA regulations. It also protects shippers or carriers from fraud and ensures payments on time. In case of violation of FMCSA rules that result in financial damage to customers, the broker is required to pay for the compensation.
Which Is Best, BMC-84 or BMC-85?
The best type of bond depends on the broker’s financial condition. If your pocket permits you and has enough money then BMC-85 is the right choice. However, if your pocket does not permit you and has a low credit amount then BMC-84 is best for you.
What Will Happen If a False Claim Is Filed Mistakenly?
If a false claim is filed mistakenly, you have to contact the freight company immediately. They have claim experts who will resolve the issue. These claims may result in a fine to the claimant.
Final Words
So, we conclude that a freight broker surety bond is an essential thing for freight brokers. It helps them operate legally & protect all parties involved in the goods transportation process. Brokers can fulfill their obligations like paying carriers and shippers. It also serves as a safety net in case of financial discrepancies.
