Freight Broker Bond Comprehensive Guide

If you have applied for a freight broker license from the Federal Motor Carrier Safety Administration (FMCSA), you should recall being required to obtain a freight broker bond. This article will help you understand what a freight broker bond is, why it is essential to acquire, and what parties are involved in the bond. This article will also provide helpful insight if you're looking to start a freight brokerage business and are unsure what steps to take.

Who are freight brokers and freight forwarders?

Freight brokers are the intermediaries between shippers(individuals or businesses that need to transport goods) and freight service providers. They specialize in certain types of freight, such as equipment hauling on lowboys, oversize, bulk tanker, auto, or other types of freight transportation. They do not own the transportation equipment but instead, connect shippers with suitable carriers to handle the shipment. Freight brokers typically work on behalf of the shipper to negotiate rates, coordinate transportation services, and ensure the efficient movement of goods. They play a vital role in matching shippers' requirements with carriers' capabilities and optimizing logistics. In the United States, freight brokers must be licensed by the Federal Motor Carrier Safety Administration (FMCSA) and are required to get a BMC-84 surety bond. 

On the other hand, a freight forwarder is a person or a company that works with carriers(individuals/parties that transport goods) to organize shipments for the shipper. They are responsible for arranging and coordinating various aspects of international or domestic shipments. Freight forwarders often provide a wide range of services, including but not limited to documentation, customs clearance, packaging, warehousing, insurance, and transportation. They may work with multiple carriers and other service providers to ensure the smooth movement of goods from the point of origin to the final destination. The FMCSA also requires them to get a BMC-84 surety bond.

What is the FMCSA?

The Federal Motor Carrier Safety Administration(FMCSA) is the federal government agency responsible for regulating and providing safety and oversight of commercial motor vehicles. They develop and enforce data-driven regulations to balance motor carrier safety with streamlined processes. It also controls safety systems that enforce regulations to protect drivers, targets educational messages to drivers and the public, and partners with stakeholders to reduce large freight crashes. 

What is a Freight Broker Bond?

A Freight Broker Bond is a surety bond that protects shippers (motor carriers) against freight brokers or freight forwarders who do not meet their contractual obligations, act in good faith, or fail to pay their trucking companies according to the agreement. The bonding company ensures the customers suffer no losses. If the freight broker or forwarder doesn't comply with their obligations or commits fraud, the FMCSA can file a claim against the bond. The surety company will then investigate the claim, and then repay the customer if the claim is found to be valid. An important thing to note here is that the maximum amount repayable is the bond amount of the BMC-84 freight broker bond. This amount is currently set at $75,000 by the FMCSA. The freight broker or forwarder will then be responsible for reimbursing the surety company for the amount paid to claims. 

Freight Broker Bonds are only valid for one year from the issue date, and the freight broker or forwarder will be responsible for renewing the bond each year to prevent losing their license with the FMCSA.

Freight Broker Bonds are also known as BMC-84 surety bonds, trucking surety bonds, transportation broker surety bonds, or property broker bonds. FMCSA uses the term "property broker" instead of a freight broker. The FMCSA requires freight brokers and freight forwarders in the U.S. to provide a $75,000 Freight Broker Bond. A surety company must issue the bond. However, since surety companies rarely sell directly to customers, brokers like SuretyNow can help you get the bond.

What are the parties involved in a freight broker bond?

Freight broker bonds are agreements between three parties. These parties are

1. Principal: The party required to obtain the bond, the freight broker or freight forwarder. The freight broker or freight forwarder is responsible for obtaining the bond as a condition for obtaining and maintaining their operating authority from the FMCSA.
2. Obligee: This is the party to whom the bond is issued, the FMCSA. The FMCSA is the regulatory agency responsible for overseeing and enforcing the transportation and safety regulations for motor carriers and brokers in the United States.
3. Surety: The surety is the company that issues the bond and provides financial protection to the obligee (FMCSA) in case the principal (freight broker or freight forwarder) fails to fulfill their financial obligations or violates the bond terms. The surety ensures that the principal will fulfill their responsibilities and compensates the obligee and any affected parties if the principal fails to do so.

Who should get a Freight Broker Bond and why?

Freight Broker Bonds are a requirement for individuals or entities that want to operate as freight brokers or freight forwarders in the United States. Therefore, if you intend to become a freight broker or freight forwarder and want to obtain your operating authority from the FMCSA, you must obtain a Freight Broker Bond.

Obtaining a Freight Broker Bond is helpful to all the parties involved in a freight broker or freight forwarder business, and here are a few reasons why:

1. Protecting Shippers and Carriers: The bond serves as a guarantee that freight brokers fulfill their financial obligations, such as paying carriers for their services. In case a freight broker fails to meet their obligations, affected parties can file a claim against the freight broker's bond to seek compensation.
2. Building Trust and Credibility for Customers: Having a Freight Broker Bond adds another layer of credibility to a brokerage or forwarding business. It reassures shippers and carriers that the freight broker is financially stable and capable of fulfilling their freight obligations. 

What is required in a Freight Broker Bond application?

The requirements to get a Freight Broker Bond may differ from broker to broker. But here is a general list of things that the surety brokers will require in your application.

1. Contact Information - Email and physical addresses are used for communication purposes (sending quotes, receiving the bond etc.) 
2. Business Ownership Documents - This helps the surety broker know the business's owner(s) and helps determine the business's credibility.
3. SSN - Social Security numbers are used to pull soft credit checks as another data point for pricing freight broker bonds
4. Bond Start Date - This lets the surety broker know when the freight broker wants the bond to be effective.

How do I get a Freight Broker Bond?

Getting a Freight Broker Bond is a quick process that involves a few simple steps.

1. Apply Online - fill out our online application, and we will handle everything else.
2. Pay online or over the phone - Depending on your financial situation. You may be eligible for instant checkout. Otherwise, we'll give you a call to provide you with a quote and take payment if you're interested.

How much does a Freight Broker Bond cost?

The cost of the Freight Broker Bond is determined by the surety bond company, typically as a percentage of the $75,000 bond amount known as the premium. This percentage is primarily influenced by the freight broker or freight forwarder's credit score, although providing additional information demonstrating financial strength and industry experience can help reduce the cost. The surety bond company evaluates all the risks associated with bonding and formulates a quote based on the provided information. A variety of factors impact the freight broker bond cost, including but not limited to the following:

1. Personal credit score
2. Years of industry experience 
3. Past bond claims history
4. Financial health of your freight broker business

The rates for Freight Broker Bonds can range from as low as 1.25% ($938) for experienced brokers with exceptional credit scores and financial records to approximately 3% to 5% for applicants with average credit scores and financials.

Can I get a Freight Broker Bond if I have Bad Credit?

Even freight brokers and freight forwarders with poor credit scores can obtain bonding. However, they should anticipate a slightly higher bond premium. Applicants with credit scores of 650 or lower, or those without any credit history, are classified as high-risk. As a result, bond rates for individuals with bad credit generally begin at 5% of the bond amount and can increase up to 12%.

How do I become a Registered Freight Broker?

To become a registered freight broker in the United States, you need to follow these general steps:

Gain working experience

Attending a freight broker training school is an excellent first step to gaining work experience and learning the skills required to be a good freight broker. Sharpening your communication skills is also pivotal to becoming a successful freight broker.

Register your business and decide on your business entity

To operate legally as a freight broker in the United States, you will need to choose a company name and register the business. Setting up a framework of operation will inform your business's ventures and will be useful in setting up a direct line of credit with banks. It will also build the confidence of your clients.

Find suitable freight carriers for your business.

Getting good carriers will ensure your business runs smoothly. They can be found through a Google search, networking events, or references.

Meet licensing requirements by applying for a USDOT number with the Department of Transportation.

Before you begin to operate, you are required by the FMCSA to acquire a Motor Carrier Operating Authority or (MC Authority). This application is straightforward and will just take a couple of simple steps:

1. Apply for a USDOT number.
2. Start the MC Authority on FMCSA's website.
3. Once you receive your USDOT PIN you can complete the OP-1 form and pay the one-time application fee of $300. The processing time is between four to six weeks for application submitted through mail and can be instant when completed online. 
4. No matter how you submitted your application, once it has been approved the FMCSA will send you your MC number and grant letter by mail. 
5. Obtain a Freight Broker Bond and general liability insurance

Once you have received your MC Authority, you must obtain a freight broker bond and insurance. Please note, your insurance company must file the appropriate forms on your behalf within 90 days of your Operating Authority being published in the FMCSA Register.  

File your BOC-3

The form BOC-3(Designation of Agents for Service of Process) allows you to choose your process agents for each state you do business in. This can be filled in and submitted to the FMCSA.

You’re set!

Once you have figured out your logistics, such as capital, you can now start operating your freight broker business!

How do I verify that a Freight Broker Bond application has been accepted?

Once you have applied for a Freight Broker Bond, you can check the status of your freight broker bond and license online by using the following easy steps:

1. Go to the US DOT and FMCSA License and Carrier Search website.
2. Enter your MC or USDOT number in the appropriate field.
3. Once you've reached the subsequent page, navigate to the rightmost column labeled "View Details." Choose either the HTML or PDF Report option
4. In this report, you can examine the "Insurance Type" field to locate the presence of a "Bond" and verify if there is any "Insurance on File." 
5. If there is an active bond on file, the column will indicate "YES"

What are the differences between BMC-84 and BMC-85?

So far we have looked at the BMC-84 as a way for freight brokers and freight forwarders to satisfy the bonding requirements of the FMCSA. However, another alternative, the BMC-85 trust fund, exists. First, let us discuss what the BMC-85 trust fund is. 

A BMC-85 is a trust fund type utilized in the freight industry. It is a financial instrument that a freight broker or freight forwarder can use to meet the surety bond requirement set by the FMCSA. Instead of obtaining a surety bond from a bonding company, the freight broker establishes a trust fund in the form of a BMC-85 trust agreement. Brokers are required to deposit the entire $75,000 into this trust fund, which becomes inaccessible to them once the deposit has been made. This option is suitable for large companies with the capital to take on the bond.

These are the differences between BMC-84 and BMC-85.

Should I get the BMC-84 or the BMC-85?

For numerous freight brokers and freight forwarders, opting for a BMC-84 bond is often a more favorable choice. This option reduces the entry barrier, offers enhanced flexibility, and eliminates the risk of losing their investment to an insolvent trust company. If you’re uncertain about which option to select, considering the BMC-84 first is recommended, as it generally provides greater flexibility and lower costs.

While a BMC-85 can still be viable, many brokers or forwarders may find it excessively expensive. With significant upfront collateral requirements, bank fees, and the potential for insolvency, a BMC-85 often presents too much risk, making it mainly suitable for larger brokers with the available capital.

How to avoid a Freight Broker Bond claim?

While most claims against a freight broker or freight forwarder are due to unfulfilled contractual obligations, we understand that there are instances where the freight broker or freight forwarder is unable to fulfill these obligations because of reasons beyond their control. Therefore, we have compiled a list of ways we feel can help to be in a situation where a claim is filed against a freight broker

1. Thoroughly evaluate carriers: Carefully screen and select carriers before assigning them to transport shipments. Verify their licensing, insurance coverage, safety records, and reputation in the industry.
2. Establish clear contracts: Develop comprehensive written agreements with carriers that outline the terms and conditions of the transportation services. Include details such as liability limits, insurance requirements, and dispute resolution procedures.
3. Maintain proper documentation: Keep accurate records of all transactions, including contracts, bills of lading, proof of delivery, and communication with carriers and shippers. This documentation can serve as evidence and protect you in case of disputes or claims.
4. Provide proper training: Train your staff to follow industry best practices and adhere to regulatory requirements. Ensure they understand the importance of accurate documentation, effective communication, and compliance with applicable laws and regulations.
5. Maintain appropriate insurance coverage: Obtain appropriate insurance coverage, including contingent cargo and errors and omissions (E&O) insurance, to protect your business against potential claims. Regularly review your coverage to ensure it meets your specific needs and industry standards.
6. Communicate effectively: Maintain open and clear communication with both carriers and shippers throughout the transportation process. Address any concerns promptly and proactively to avoid misunderstandings or disputes that could lead to claims.
7. Resolve issues promptly: In the event of a problem or dispute, take immediate action to resolve the issue. Communicate with all relevant parties and work towards finding a mutually satisfactory solution to prevent the escalation of the situation into a claim.
8. Stay updated with industry regulations: Keep yourself informed about the latest regulations and requirements imposed by regulatory bodies such as the FMCSA. Adhering to these regulations will help you operate in compliance and minimize the risk of claims.
9. Seek professional advice: Consult with legal and insurance professionals who specialize in freight to ensure you have the necessary safeguards in place and are following best practices to mitigate the risk of claims.

How to make a Freight Broker Bond claim?

You may be unsure how to handle a situation like a freight broker or freight forwarder not paying you on time, or not fulfilling their contractual obligations for example if they ​​fail to secure a carrier transport shipment within the agreed-upon timeframe. In the case when a freight broker falls short of their contractual expectations, doesn’t act in good faith, or violates FMCSA regulations, you are able to file a claim against the freight broker or freight forwarder and receive compensation for any losses incurred due to the actions of the freight broker or forwarder. We will take you through how to get started in the process of filing a claim.

Make sure you have the necessary documentation:

1. Cover Letter explaining the situation in detail 
2. Broker/Carrier Agreement
3. Invoice submitted to the broker and the dates it was sent
4. Rate Confirmation
5. Bill of lading (BOLs) and Proof of Delivery(PODs)
6. Emails, text messages, and any communication that supports the facts stated in your cover letter

You will then need to find the principal’s surety provider from the FMCSA website by doing the following:

1. Go to SAFER WEB and search for the broker using their name or their MC number
2. Once you are on the broker’s authority information page, on the upper right-hand side, under “Other information there is a link for Licensing & Insurance. Click this link
3. SAFER WEB will then prompt you to do a reCAPTCHA verification. Click the button and press search
4. This will load the broker’s licensing and insurance information page. You can select the HTML or PDF button on the right-hand side depending on your preference.
5. The PDF will pull up a document where you can scroll through and find the bonding insurance agencies’ info. If you click on the HTML button, that will take you to a webpage with more of the broker’s information including their active/inactive dates.
6. Click on the Insurance History link to go to their insurance information
7. The page that loads will contain the surety company that holds the bond. You should contact them for them to guide you on where to send your documents and what their specific filing process looks like.

When should I renew my Freight Broker Bond?

In general, it is recommended to make the payment for the bond premium at least 30 days prior to the expiration of your bond. This earlier deadline is set due to the cancellation policy implemented by the FMCSA. According to this policy, surety companies are required to submit a written notice to the FMCSA 30 days in advance if a bond is at risk of being canceled.

Once the renewal has been accepted by the FMCSA, it becomes visible to everyone in the FMCSA’s Licensing and Insurance Database.

Getting a Freight Broker Bond might seem like a complicated process, but trust us, it’s not! We hope this article has shed some light on the process of getting the bond, informed you on how to become a licensed freight broker or freight forwarder, and answered any other questions that you may have had along the way.