Trust Funds vs. Freight Broker Bonds: What's Best for You?
BMC 84 (Surety Bond)
BMC 85 (Trust Fund)
BMC 85 (Group Bond/Trust)
|Accepted by FMCSA?||✔ Yes||✔ Yes||✘ No|
|Collateral?||✔ No||✘ Yes, 100% is required||✘ N/A|
|Verified Security?||✔ Yes, Department of Insurance||✘ No, you must verify||✘ N/A|
|Impact Personal Credit?||✔ No, surety credit is unrelated||✘ Yes, impacts your ability to get loans||✘ N/A|
|Guarantor||✔ Bonding company assets||✘ Your assets||✘ N/A|
Which Option Allows You to Get Your License?
The FMCSA will allow you to use either a surety bond or a trust fund to get your freight broker license. The FMCSA recently ruled that the group bond/trust fund is no longer an acceptable form of security for your license. If you have already purchased a group bond/trust fund, you must replace it with either a surety bond or a fully funded trust fund to avoid having your authority revoked.
How Collateral Hurts Your Brokerage
A trust fund requires you to post 100% collateral for the full FMCSA required security, which is currently $75,000. Collateral is your money held by a bank which is used to pay any potential claims caused by not following FMCSA regulations. Coming up with tens of thousands of dollars is hard, if not impossible for smaller brokers. Posting 100% collateral also ties up your working capital which can be a big problem for smaller freight brokers trying to compete in an aggressive industry.
There are bond agencies that offer freight broker bonds without requiring any collateral, which is a huge bonus with regard to your working capital. If you choose to get a bond through our agency, you will not be required to post any collateral. Find out why our agency writes more freight broker bond than anyone else.
Beware of Underfunded Trust Funds
Not all companies who offer trust funds fully fund them to meet FMCSA requirements. One company, named Oasis Capital, Inc. was recently indicted due to underfunding their freight brokers trusts by not requiring enough collateral to meet FMCSA standards. Unfortunately, the FMCSA doesn't verify that trust funds are fully funded when they are filed in its system. Once the FMCSA realized the trust funds didn't have the required funds backing them, hundreds of freight brokers had their trusts revoked, and were left with the option of closing their brokerages or spending more money to meet the FMCSA requirements. If you choose to go with the trust fund to get your license or already have one in place, it's crucial that you follow these steps to verify your trust meets FMCSA standards.
Surety bonds are regulated by the Department of Insurance, and surety companies are given a financial size category and financial stability grade by A.M. Best (a financial strength rating agency). This means that the government uses the surety companies' ratings to ensure everything is in place and meets FMCSA standards for you. Find out what makes a good freight broker bond company.
Need Loans? Choose Your Option Wisely
A trust fund makes it more difficult to qualify for loans. Why? If you use a trust fund to get your freight broker license, you are required to have tens of thousands of dollars frozen in a bank account, which uses up your equity. You can look at your equity as borrowing power, and when you tie up a large portion of that borrowing power posting trust fund collateral, it will likely be harder to get the loans you may need in the future.
Surety bonds do not affect your ability to obtain loans. When you get a surety bond, the surety company is backing you with assets guaranteeing that claims will be paid, as opposed to making this guarantee with your own cash. If you do cause claims, the surety will pay for them initially. However, you are ultimately responsible to pay bond claims. Find out the other reasons why you should care about freight broker bond claims.
Who's Financially Backing Your Brokerage?
As stated above, a trust fund requires you to post 100% collateral, and your money is used to guarantee that you'll follow FMCSA regulations and that you will pay potential claims. If you cause claims, your funds will be used to pay them, and the huge amount of false claims in the freight broker industry makes this a major downside to trust funds. In other words, you're backing your own brokerage with your cash.
If you get a surety bond from a good freight broker bond company, your cash won't be used to guarantee you'll follow FMCSA regulations. The surety company who provides the surety bond guarantees you will follow the rules and financially back your brokerage with their assets. Look at the surety bond as a form of credit to you provided by the surety company.
Now that you have a better idea of the main differences between freight broker bonds and trust funds, you can make a sound decision for your brokerage. If you choose to obtain a freight broker bond, take a look at our guide for help getting your bond and license.
Author: Eric Weisbrot
Eric is an industry expert that specializes in taking complex surety concepts and explaining them in terms that make sense to the general public. He also manages the JW Surety Bonds website and works with various partners to help further educate the public on suretyship using various mediums.
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