Getting a bond or trust fund is a critical step on the path to becoming a freight broker (sometimes called a trucking broker). It’s a license requirement, meaning you can’t work legally without one of these. But as we know from our clients, the bonding process can seem very confusing. Common questions like these may arise:
- What is a bond?
- How does it compare with a trust?
- What’s right for my business?
If you’re wondering all of these things, we can help you out. Continue reading to understand the freight broker license process, how to find the best deal, and why you need to make sure you avoid claims down the road.
Getting Your Freight Broker License Surety Bond or Trust Fund
There’s a federal legal freight broker requirement to have $75,000 available to cover possible claims. You have two options to do this: you can either obtain a BMC-84 surety bond, or get a BMC-85 trust fund. Then, the trust or bond agency will file it electronically with the FMCSA to prove you’ve fulfilled the requirement.
Option One: BMC-84 Surety Bonds
A BMC-84 surety bond is a type of insurance for your customers that protects them in the event you fail to fulfill your obligations as a freight broker. It is not designed to protect you from liability. The surety bond is in place to assure federal regulations will be followed and that carriers will be paid in a timely manner. If this is not the case, the bond company will step in to ensure the customer suffers no losses. This guarantee on your behalf is considered a form of credit to you, for which you pay a percentage of the bond amount.
It’s important to understand when you purchase a surety bond, you will sign a legal agreement indemnifying the bond company and will be required to repay the full amount of all valid claims.
Surety bonds are useful when claims against you are filed, but of course, the best thing to do is avoid those claims in the first place. Even having a claim filed can make it much more difficult to obtain a surety bond in the future, possibly putting you out of business. So it’s essential to closely follow FMCSA regulations, make your payments on time, and resolve conflicts before they reach the claims stage.
To make sure you do everything correctly, it’s best to have a bonding agency which is also an MGU (Managing General Underwriter), meaning they make the underwriting decision and act as your advocate in the claims process. An MGU can also help educate you in how to avoid claims in the first place.
A bonding provider will evaluate your company based on your credit and charge you an annual premium, which is a percentage of the $75,000 bond amount required by the MAP-21 law. With JW Surety, the largest provider of surety bonds in the country, this percentage usually amounts to between $900-$2000 a year. This type of bond is often referred to as a BMC-84 after the name of the document you file with the FMCSA.
Option Two: BMC-85 Trust Funds
With a trust fund, you place the full amount of $75,000 into a trust, which you will be unable to touch. You’ll also have to pay a bank fee for this service. This choice is more common amongst larger brokers and carriers, but for anyone getting started isn’t a very good option because of the large upfront cost. For a more full comparison between these two options, check out JW Surety’s article.
Also, many trust companies advertise that freight brokers can fund their trust with cash, an Irrevocable Letter Of Credit (ILOC), or pay the trust company to obtain an ILOC on their behalf. But it’s important to note that anyone considering purchasing a trust fund needs to verify that the trust fund company is not under-funded.
Getting Bonded with Bad Credit
Bad credit is one of the most common worries for people who need to get bonded. In such cases a surety bond is the better option because getting a loan for the full $75,000 is going to be difficult with credit problems. But even if you choose to go the BMC-84 route, keep in mind that not all agencies are able to provide bonds to applicants with bad credit.
It’s important to choose a big bonding agency which works with a large number of bond providers. By communicating with many different sureties, the agency will be more likely to find a reasonable rate for your freight broker bond in spite of your low credit score. Of course, bad credit will increase the cost of your bond, but the most vital thing is that you’ll still be able to get bonded and open your business.
In the meantime, there’s a lot you can also do to improve your credit. Paying your bills on time, avoiding reaching limits on your lines of credit, only applying for new lines of credit when you need them, and paying debt instead of moving it can all make a big difference over time. Once you apply to renew your bond, your improved credit score will be taken into account and your bond cost will decrease accordingly.
You can also feel good knowing that a surety bond doesn’t affect your credit standing.
Avoiding Group Trusts or Bonds
Many still incorrectly believe that group trusts or group bonds are valid ways to fulfill the FMCSA’s bonding requirements. However, these options were removed by the MAP-21 law and no longer fulfill the requirement. Unfortunately, some agencies are still attempting to sell these trusts or bonds in spite of this. These illegal tactics often go under the radar until caught by an FMCSA audit. When this has happened it has put brokers out of business.
Once you’ve got your bond or trust, you’ll be ready to complete the other steps towards getting your license and getting started brokering freight.
For a complete guide to every aspect of becoming a freight broker, download our free e-book, The Freight Broker Starter Kit: