Since the enactment of MAP-21, there has a lot of confusion on what options freight brokers have and the differences amongst them. The confusion stems from inaccurate information flooding the online world on already confusing financial products. In this article we’ll explore what options are out there and provide a direct comparison of each to see which is best for you.
We will go beyond costs and look at a comparison of what you’re actually buying and how likely you are to actually qualify for it.
Note: This is not comparable to a trust funded by a letter of credit, which negatively affects your credit capacity.
A trust is a bank account that the freight broker fully funds with $75,000 cash or a loan. The funds in the account are under control of the bank to ensure they are available to the FMCSA in the event of a claim.
A trust is the most stable product of the three. Since the funds exist in the account, claims can always be paid. Other freight brokers working with the same trust cannot have a negative effect on you, as everyone’s accounts are separate. There is no risk of the product going under.
Trusts require 100% collateral, making it the harshest option to fulfill monetarily. While it can be funded using cash or even a loan, it still requires you to take liquidity/credit and freeze it with a bank.
Since trusts are fully funded by the freight broker, the only costs are small management fees and the lost investment interest on the tied up liquidity. In most cases, the total costs for this option is the lowest for those that can afford to fund it.
The biggest hurdle for the trust is coming up with the cash to fund it. At $75,000 that is quite a big hurdle indeed. Experience, credit score, and some other minor underwriting can be factors as well, but the biggest obstacle is the collateral by a long shot.
A fully funded trust is the best option for those who can afford to part with $75,000. However, since most small businesses do not have $75,000 they can easily part with, this is an option for very few.
Total Score: 26
A surety bond is a guarantee from an insurance carrier (bonding company) that you are “good for it” should a claim arise. With this product, you aren’t using your own assets to make the guarantee to the FMCSA, you are paying an insurance carrier an annual fee to use theirs.
The risk of a bonding company going under is extremely low, but it can happen. Keep in mind, the bonding company is making guarantees to say “you’re good for it” on claims. However, if you cannot pay claims, they are responsible to pay them. If too many claims occur, the bonding company could go under. While that may sound scary, the risk is still extremely low. Bonding companies are heavily regulated by the government and are required to have a certain amount of money called reserves to ensure they can put their money where their mouth is; many have billions in assets to ensure they can do just that (ours does!).
It is always wise to do your homework to find out who is backing your bond. It’s important to get a bond from a company with an ‘A’ rating from A.M. Best. This rating means that a third party has reviewed the stability and outlook of the bonding companies finances and put their seal of approval on it.
Until recently, the surety bond option required collateral for the majority of freight broker applicants. However, that has all changed and now there are options available with no collateral required for anyone whether they have business financials or not, good credit or not. Collateral is no longer required on any quote, for anyone.
While annual fees are not as low as a fully funded trust, they are much more obtainable for the average freight broker since no collateral is required. Pricing starts at around $1,000 per year and approvals can be obtained instantly online.
The surety bond option was extremely difficult to obtain except for mega brokers until recently. Now people can be approved without business or personal financials, no experience, no collateral, even with bad credit. We have received thousands of applications on the $75K bond, but have only declined one. The rest were approved without collateral.
Surety bonds are now the best option for the masses. Bond markets have loosened up and anyone can now obtain a surety bond quote without collateral, even if they don’t have business financials or their credit is flawed.
Total Score: 36
UPDATE: Since writing this article, the FMCSA has stated that the surety trust pool option is not an acceptable form of financial security to meet the $75K requirement. Continue reading our analysis below to find out why.
A surety trust pool has participants pay an annual fee to contribute to a group fund. The funds are used to pay out claims from any/all group members.
One could say this is a partially funded trust or a surety bond offering with no additional financial assets (called reserves) to ensure claims can be paid.
This option is most akin to buying a surety bond with a bonding company that wouldn’t even receive a “junk bond” F-rating, as they do not meet the government minimums in reserves to be a compliant licensed insurance company. Should claims exceed the groups funds, there are no additional assets to back up the freight brokers.
Note 1: A “surety trust pool” is terminology recently created by some companies offering this product. However, it is not a trust, as it is not fully funded; nor is it a surety bond, as there is no financial backing to say you are “good for it”.
Note 2: MAP-21 does allow for a group bond to be provided by an entity that is not licensed and regulated by the insurance department, but reserves in those cases must be backed on a dollar per dollar basis in the form of an acceptable asset (e.g. cash, real estate, etc.). As of today, there are no licensed surety bond carriers or properly funded non-insurance entities offering a group bond option.
“Surety trust pools” are by far the riskiest product among the three. Underfunded trusts were previously deemed unacceptable by the FMSCSA. It is possible this product will not be accepted by the FMCSA initially or in the near future. It is also possible for claims to outpace the funds collected, which would bust the fund and require freight broker participants to fully fund a trust or obtain a real surety bond from a licensed insurance company.
There are options to post collateral to reduce annual costs, but group members can participate with no collateral posted.
Pricing for applicants that do not want to post collateral is around $3,500 per year.
Most applicants qualify for this option. Some applicants with bad credit may have issues, but the majority of brokers credit profiles put them in the range to make this an option.
Surety trust pools may appear to be a good option for some freight brokers at first glance. However, the high likelihood of the FMCSA not accepting this option and the strong possibility of the fund going bust, make this a very unattractive option. Freight brokers that think a surety trust pool is going to save them money may be put out of business when they have to fund a real trust or purchase a real surety bond from a licensed insurance carrier.
Total Score: 23
(scale is 1-10, with 10 being the most beneficial)
|Fully Funded Trust (BMC-85)||Surety Bond (BMC-84)||Surety Trust Pool (?)|
|Ease To Obtain||4||9||7|
*The scoring listed above is not reflective of a trust funded by a letter of credit, which negatively affects your credit capacity.
They say a picture is worth a thousand words. In this case, a chart does a very good job of showing the different risk of each product. Below we broke each product out by how much money they collect annually on average and how much in assets they have to back up any guarantees. If we assume a bonding company has only $100,000 in reserves, you can see the difference is quite dramatic.
It is important to keep in mind there is no risk when it comes to a fully funded BMC-85 trust fund (something we do not offer). They are only listed in this chart for demonstration purposes of funds available.
The chart above is nice to show a demonstration of the drastic difference in risk we’re talking about, but it is not accurate. In reality, bonding companies are required to have a minimum of $7,500,000 in reserves to write a $75,000 surety bond. The above chart was simply to get an idea of what we’re demonstrating. The chart below is the reality of the minimum risk posed by a bonding company. After-all, these are very large insurance companies heavily regulated by the government backing the bonds.