Also known as freight broker bond, a freight forwarder bond is a type of surety bond that protects the customers of freight brokers and their customers’ drivers. To better understand what freight forwarder bonds are and how they protect customers, keep reading.
Freight forwarder bonds are essentially an agreement between three parties that ensures the freight broker will fulfill specified tasks. Let’s look at who these three parties are and what role they play.
The principal. This is the freight broker. They are legally required to have a fund that they can tap into if they are one day unable to honor contracts and pay truck drivers or deliver loads for clients. The freight forwarder bond can step in to pay any claims against the bond initially.
The obligee. The Federal Motor Carrier Safety Association (FMCSA) is the obligee of the freight forwarder bond. They are the party that requires the surety bond and won’t let freight brokers operate without one.
The surety. The surety is the bond agency that provides the bond to the principal and who pays out any initial claims that they approve after an investigation.
The surety requires the freight forwarder bond so that if the principal reneges on their agreement, the shipper will be compensated.
Here’s an example of why the shippers need protection in the form of a freight forwarder bond. If the shipper doesn’t receive their goods, they may not be able to pay their truckers. The shippers may then choose to file a claim against the freight forwarder bond so they can afford to pay their truckers—who would likely stop working for the shipper if they don’t receive timely payment. The surety would then conduct an investigation of the claim and if they approve the claim would pay it out, but the principal would need to eventually pay them back.
Not only do freight forwarder bonds help protect shippers, they help keep the entire economy running smoothly and protect all of us.
Before a freight broker can qualify to obtain a freight forwarder bond, they need to secure the following things:
An operating authority from the FMCSA
Public liability insurance
A BOC-3 form from the FMCSA
When you apply for your FMCSA operating authority, you will need to get public liability insurance at the same time, which simplifies this process. Once you register as a federally-approved process agent, you can contact a surety bond company and apply for a freight broker bond.
There are two different types of freight forwarder bonds (both of which are financial agreements that the FMCSA approves for brokers) that you’re likely to come across. This is how these two types of surety bonds differ.
BMC-84 bond. The freight broker can use a BMC-84 bond as a form of credit, that way if they violate FMCSA regulations, your customers and trucking companies are protected from potential losses. According to the MAP-21 law, a BMC-84 bond insures your affiliates for up to $75,000 in damages if their claim is approved.
BMC-85 trust fund. Large firms or established brokers are more likely to choose a BMC-85 trust fund arrangement, as in this case, the broker fully funds the government-mandated $75,000 into a bank account. They can’t touch those funds, as the funds must remain in the account unless paid out for a claim against the freight forwarder bond.
So, how much does it cost to secure a freight broker bond? That depends on a few factors including the specific bond type and the applicant’s personal credit score.
If someone wants to take out a BMC-85 trust fund, they need to be able to pay the $75,000 that will be stored in the trust account. This is why this option is usually more feasible for larger and more established brokers. For a BMC-84 bond, rates can vary, but it usually costs between $900 and $2,000 a year.
Your credit score can also impact how much you’ll spend. Once someone applies for a freight forwarder bond, the surety company will take their personal credit score into account to determine how much to charge them. The higher someone’s credit score is, the lower their price will be.
It’s important to budget for the cost of a freight forwarder bond as having one is absolutely necessary to start and maintain a freight brokerage business. Not only is having one a requirement in this industry, but it lends a lot of credibility to your business, which can make it easier to land contracts and keep your business partners happy.Apply »