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The Importance of Freight Broker Bonds for your Business

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Archives, Global Logistics, Global Trade Daily, Trucking

The Importance of Freight Broker Bonds for your Business

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Opening a freight brokerage can be a great way to accelerate your earnings. Freight brokers play an important role within the transportation industry by connecting shippers with transportation companies for trucks required to deliver their goods. While some shippers have contracts with specific trucking carriers, others rely on freight brokers for added flexibility, greater speed of delivery, and lower costs.

Freight brokers are required to comply with the Federal Motor Carrier Safety Administration’s regulations for licensing. There are a few different types of operating authority licenses that freight brokers need to operate within the US, depending on the type of cargo they broker. All of the different types of freight broker operating authority require brokers to meet certain requirements, including being bonded with a freight broker surety bond. Here is some information about freight broker bonds so that you can get started with your business and ensure that it successfully operates.

What Is a Freight Broker Surety Bond?

Also known as a BMC-84 bond, a freight broker surety bond is a type of guarantee issued by a surety company that the principal holder will perform the work as promised. It is not insurance since the principal broker is not protected from liability by the bond. Instead, a BMC-84 bond is required by the government before a broker can become licensed. It is meant to protect the companies that rely on the broker and contract with it for services and to ensure that the broker will comply with the applicable regulations and laws while operating.

If a freight broker fails to fulfill its contractual obligations, a claim can be filed against the bond. However, the surety company is not responsible for paying the claim. Instead, the freight broker must pay claims filed against its bond. The surety company only steps in when the freight broker fails to pay its claim. If a freight broker has unpaid claims, it could lose its surety and its ability to continue operating.

A broker that fails to pay a carrier what the carrier is owed might have a claim filed against its bond. The carrier’s claim will be in the amount the broker owes for the services the carrier provided for the shipper the broker connected the carrier to for the transportation of freight. An unpaid claim against the surety could result in the surety terminating the bond and the loss of the broker’s license. It can also make it more difficult for the broker to secure a new freight broker bond, forcing the broker out of business.

Why Are Freight Broker Bonds Necessary?

The Federal Motor Carrier Safety Administration requires brokers to secure operating authority licenses and to renew them annually to continue operating within the US. One of the requirements for securing and renewing an operating authority license is to secure and maintain a surety bond for freight brokers.

The governmental requirement for brokers to be bonded is meant to protect the companies that depend on them. This is why surety bonds for freight brokers protect the parties with which the brokers contract instead of the brokers themselves. If you do not secure and maintain a BMC-84 freight broker bond, you will not be able to operate your freight brokerage since you will not be able to secure or renew your operating authority.

Which Parties Are Involved in a Freight Broker Surety Bond?

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

• Principal – The freight broker seeking the bond to secure or maintain its operating authority license

• Obligee – The governmental agency requiring the bond, which is the FMCSA

• Surety – The surety company issuing the surety bond

How a Freight Broker Bond Works

A freight broker must find a surety company to issue a bond so that the broker can secure an operating authority license from the FMCSA. The surety company will go through an underwriting process before agreeing to issue the bond. It will review the broker’s credit and financial history, ensure that the broker has sufficient working capital to cover the maximum bond amount and check its history for past problems.

The bond functions similarly to a person’s credit score. If a broker has a history of multiple claims or past unpaid claims, the surety company might deny the application for the BMC-84 bond. If it does agree to move forward with issuing the bond, the freight broker bond cost will be much higher than if the company had instead established a good operating record.

The principal must pay a percentage of the maximum bond amount upfront to secure the bond. This cost might range from 1% of the total bonded amount for freight brokers with good credit and reputations to 15% for those with poor credit or with marks on their records.

Freight broker bonds expire, but they can be renewed. Since a freight broker must also renew its operating authority annually with the FMCSA, it must maintain its surety bond and renew it if it is getting ready to expire. A surety company can also terminate a bond when the principal has unpaid claims and refuse to renew it.

While freight broker bonds are not insurance and do not protect your business, they are a necessary part of operating a freight brokerage in the US. You cannot secure or renew your operating authority to broker freight between shippers and carriers within the US without having a valid freight broker surety bond.

Since your history with your bond could potentially harm your business reputation and your ability to continue operating, it is critical for your company to establish a good record and to meet its obligations if any claims are filed against your surety. Establishing a good history by complying with the law and meeting your contractual obligations can help your business to be more successful.

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Archives, Global Trade Daily, International Trade

It’s All About Relationship with Freight Brokers. Here’s Why.

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Several moving parts exist to make the transportation and logistics industry succeed. From truck drivers and innovative technology companies, to shippers, carriers, and freight brokers, each part of the marketplace helps create smoother transfer of goods while improving efficiencies across the board. When it comes to freight brokers – the licensed intermediaries who work to connect carriers and manufacturers – the ability to run a successful operation relies on a foundation of business relationships. Freight brokers must take the time to cultivate their partnerships and connections from day one to ensure they have what they need to sustain a viable business.

Understanding the Freight Brokerage Business

Recent statistics estimate the total number of freight brokers working in the United States to be slightly more than 17,000. Some work independently under their own business structure while others are employed by large brokerage firms. In either scenario, licensed brokers have to go through distinct steps to ensure they are operating within current federal laws. The most important part of the licensing process is registration and obtaining motor carrier authority through the Federal Motor Carrier Safety Administration.

Along with this requirement, freight brokers must also go through formal training at a freight broker training school to learn what is necessary to become effective in the field. The licensing regulations also require brokers to hold a bond or a trust, with the most common choice being a freight broker bond. Obtaining a freight broker bond is one of the first situations where a strong relationship is necessary.

A bond is a form of credit extended to the broker, based on their financial track record and credit history. If a claim is made against the bond because the broker has engaged in business practices outside the lines of federal regulations, the claim amount is paid from the bond on behalf of the broker. This structure means that the surety company offering the bond must trust that the freight broker is a good candidate for the bond, meaning there will be minimal claims in the future. Maintaining a relationship with the surety company is beneficial when bonds renew, and it can be helpful when claims arise.

Relationships and Cash Flow Help

Business relationships are also a crucial aspect of a freight broker’s business when it comes to financial partners. Banks, credit unions, and online lenders exist to help small businesses fund large projects, expansion, or to cover cash flow when the need arises. However, without a relationship with certain lenders or finance companies, freight brokers may find themselves in a hard to navigate position.

For some freight brokers, cash flow can become tight when customers are slow to pay or when business slows down. The business still has overhead to pay, and there may be a need for increased marketing or advertising to entice new customers to connect. Each of these issues requires available capital. A relationship with a finance company, such as an invoice factoring, small business loan, or line of credit lender can make all the difference in getting through a dry spell or a time of high growth.

Keeping Customers Satisfied

Finally, relationships are essential to freight brokers when it comes to working with their customers. Although the size of the freight brokerage market is small compared to other facets of the transportation or logistics industry, competition grows each day. The barriers to entry to start a brokerage business are minimal, as are start-up costs, and so many with industry experience join the ranks of freight brokers consistently year over year. The increased number of licensed brokers can make it challenging for seasoned professionals to keep the upper hand on competitors.

Maintaining strong working relationships with customers, business connections, and networking partners are necessary to keep ahead of the competition. When other professionals in the industry know that a particular broker is known for delivering on his or her promise to shippers and carriers, they are likely to stay busy with work. Similarly, having processes in place for clear communication and managing issues when they come about helps strengthen relationships over time.

Being in the freight brokerage market can offer a lucrative career path for those with a passion for moving freight efficiently. However, healthy relationships are a must throughout nearly every aspect of the business. Brokers need to ensure they have built up and can maintain good connections with their surety company, finance partners, and of course, their customers and business partners, if they want to be successful now and in the future.

 

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

Archives, Features, Global Trade Daily, News

How to Become a Freight Broker

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Do you have an interest in the transportation and logistics industry? Maybe you’ve always been drawn to trucking or shipping but don’t know how to put that passion to good use? Becoming a licensed freight broker may be a smart career move for you if these are questions you have pondered over time. A freight broker works as an intermediary between manufacturers and shippers, helping move products and goods from one location to the next. Freight brokers can make a steady living working for themselves or as part of a team, and they have an opportunity to do the work they love from home or an office setting.
However, there are certain steps one must take to become a licensed freight broker, including getting the right training, developing a business plan, meeting legal requirements, and obtaining a bond or trust fund. Here’s what you need to know if becoming a freight broker is in your future.

Get the Right Training

One of the first steps in becoming a licensed freight broker is obtaining the right training. Industry experience, in trucking, shipping, or logistics, goes a long way in laying the groundwork for a successful career as a freight broker. However, there are also classes and courses that can and should be pursued in order to get a full understanding of the business. These training opportunities are not legally required to become a freight broker, but they do offer information about trends in the industry, best practices, technology tools, and operating a business in the field.
Several freight broker training schools offer classes and coursework to those who want to work as a freight broker. Some schools offer in-person classes that provide a more personalized curriculum while others are self-study classes completed online. You can use this resource to uncover the top freight broker training schools as well as the classes you might want to complete in order to get your brokerage up and running successfully from the start.

Develop a Business Plan

In addition to industry experience and formal training in the freight broker field, you will also want to develop a business plan to set yourself up for success. Having a strong business plan allows you to evaluate what you need to establish your brokerage now as well as what is required for a solid, profitable future. A business plan includes detailed information about revenue sources, customer acquisition, strengths and weaknesses of the business, and projected financial information that acts as a budget. You can utilize business plan templates like those found on the Small Business Administration’s website to tackle this task.

Meet the Legal Requirements

After developing your business plan, your next step is understanding the meeting the legal requirements to become a licensed freight broker. You will need to register as a motor carrier and receive your motor carrier number through the Federal Motor Carrier Safety Administration, or FMCSA. You will also need to secure your motor carrier authority which is done through an application submitted online. This application requires you to pay a non-refundable $300 fee, so be prepared for this cost when applying. The process of obtaining these legal requirements and submitting the application can take several weeks. Be sure to review the information needed as part of the application process beforehand, and gather the right documentation before submitting your application.

Obtain Your Bond or Trust Fund

In addition to the application process mentioned above, new freight brokers must also satisfy the bond or trust fund requirement. The license to become a freight broker requires you to have a freight broker bond or to establish a trust fund in the amount of $75,000. The bond or trust fund protects shippers and carriers against bad business practices of the licensed broker.
The good news is that if you select the bond option, you do not have the pay the full bond amount of $75,000 up front. Instead, your surety agency charges you a percentage of the total bond amount, with the out of pocket cost ranging from $500 to $2,000. The price you pay is heavily dependent on your financial standing, including your personal credit score and history, so be sure you have your financial ducks in a row before applying.

Have a Marketing Strategy

After you have developed a sound business plan, met the legal licensing requirements, and obtained your freight broker bond, you’re ready to start working with customers. However, you will need a marketing strategy to help you get off on the right foot as a newly licensed freight broker. Many brokers use a combination of business relationships and freight load boards to create potential business, while others use social media, e-mail marketing, and an online presence to generate interest. Any combination of these marketing strategies can be beneficial. Just be sure to budget for the marketing methods you plan to use, and be flexible in your approach if one seems not to work as well as you intended.
The steps to become a licensed freight broker may seem daunting, but following this order makes it easier to get up and running in the industry quickly.

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.