Businesses that operate in the trucking and freight industry face a considerable amount of risk. And if they fail to manage or outsource that risk, the majority of them would be ruined in less than a year. Luckily, freight broker bonds exist to mitigate the financial risk to the business while making sure customers are safe and secure. Most people are not aware of how important these bonds actually are. That’s why, in this article, we’ll go over some of the reasons why freight broker bonds are essential for your business.
What Are Freight Broker Bonds?
A freight broker bond is a type of surety bond that freight brokers and freight forwarders in the US need to get as a part of their licensing process. In fact, the Federal Motor Carrier Safety Administration (FMCSA) requires these businesses to renew their bonds every year.
Freight broker bonds are also known as BMC-84 bonds, since BMC-84 is the name of the form required by the FMCSA in order to obtain your brokerage authority. Other terms you will often hear are: transportation broker surety bond, trucking surety bond, and property broker bond.
The Role of Freight Broker Bonds
The main goal of these bonds is to make sure that freight brokers operate in accordance with all the applicable laws and regulations. Furthermore, freight broker bonds also guarantee that a bonded company will adhere to their contracts and agreements with their clients. If the company fails to meet these expectations, it becomes responsible for financial consequences that arise as a result of their failure.
How Do Freight Broker Bonds Work?
Although people often confuse bonds for insurance, these two are far from identical. First of all, unlike insurance, freight broker bonds are not there to protect your company directly. Instead, they primarily protect your clients and partners. Secondly, while insurance involves only two parties (a business and an insurance company), most surety bonds involve three parties:
- The principal is the company that purchases the bond (in this case, that would be the freight broker).
- The obligee is a party that requires the bond (FMCSA or clients).
- The surety is the surety company that provides those bonds.
If the principal acts contrary to law or violates their contract with the client, the obligee can file a bond claim. Afterward, the surety investigates this claim to decide whether it’s valid or not. If the claim turns out to be valid, the surety can choose to mediate between the two parties in order to resolve the dispute.
However, if a dispute doesn’t get resolved, the surety company needs to make financial compensations to the claimant. Still, it’s not the surety that ultimately covers these losses, but the principal, as they need to repay the surety for the claim.
Benefits of Freight Broker Bonds
It’s perfectly clear how freight broker bonds can benefit your clients and partners. Still, the advantages of these bonds for you as a freight broker may not be instantly obvious. In fact, most businesses in this industry see them as an inevitable yet meaningless expenditure. However, this assessment is far from true, since freight broker bonds bring many benefits to your business, including:
- Your assets remain free and available
- Strong representation in disputes
- Signaling security and reliability
1. Your Assets Remain Free and Available
Although a freight broker bond is mandatory for the licensing process, there is an alternative freight brokers can opt for. Namely, establishing a trust fund will also satisfy FMCSA’s pre-licensing requirements. You can think of this trust fund as a bank account that you need to share with FMCSA. So, whenever there is a claim against your company, FMCSA can access your trust fund and make use of your money.
At first glance, establishing a trust might seem like a pretty good deal. However, it becomes much less attractive when you realize that as much as $75,000 of your money will be trapped in this fund. On the other hand, if you decide to go with surety bonds, this money will be available for further investment.
2. Strong Representation in a Dispute
Another important advantage of being bonded as a freight broker is the fact that you have the surety by your side. So, if a false claim is filed against your bond, you can remain calm knowing that the surety company will carry out a detailed investigation. Furthermore, even if the claim is valid, the surety will try to resolve the dispute on your behalf without financial compensation.
On the other hand, if you opt for a trust fund and a dispute arises, you will have to represent your company without anyone’s help. Furthermore, your trust company of choice will often pay claims with little to no investigation since it has no liability. So, your clients and partners could choose to exploit your position for their financial gain.
3. Signaling Security and Reliability
Generally speaking, a company with a surety bond to its name will seem safer and more trustworthy. The same goes for freight broker bond owners, as this bond tells your partners and clients that they are in safe hands. Furthermore, they will appreciate that they bear no risk even if your company makes a mistake.
Final Thoughts
Freight brokers often overlook the importance of a freight broker bond. However, this bond is essential for the operation of your business—providing your clients and partners with much-needed security. So, if you are starting a freight brokerage firm or just renewing your license, make sure to contact a surety company such as Lance Surety today.
