The transportation law, MAP-21, gives freight brokers and forwarders options for the $75K financial security requirement, but specifics are not always clear. With the FMCSA deadline approaching in just a week, here is some information on an option for small- to mid-size carriers who also act as brokers.
What Options are Available?
The FMCSA requires freight brokers and forwarders to obtain a surety bond or trust fund agreement as financial security for licensing. Either choice guarantees payments to shippers or motor carriers should the broker fail to carry out their contract. Under MAP-21, this financial security requirement will increase from $10,000 to $75,000 on Oct. 1.
MAP-21 also allows for what is known as a group surety trust to meet the new $75K requirement. However, the FMCSA has indicated they will not be accepting group trusts at this time.
What is a Freight Broker Bond (BMC-84)?
Freight broker surety bonds are filed with the FMCSA on Form BMC-84 which serves as proof the broker or forwarder has met financial responsibility requirements. With a BMC-84 bond, the cost is a percentage of the bond amount, or premium, paid to the surety provider. The bond is a guarantee with reserves in place to pay for potential claims. Collateral may be required for freight broker bonds depending on the surety.
What is a Trust Fund Agreement (BMC-85)?
The BMC-85 trust fund option requires $75,000 full collateral deposited with a bank, trust company or other insured institution. The broker or forwarder’s money is held by the financial institution in escrow for the duration of their license.
Compare the BMC-84 Bond and the BMC-85 Trust Fund Agreement
There are two primary differences between the BMC-84 bond and the BMC-85 trust fund.
The first is cost. Surety bond premium is a percentage of the full amount of the bond paid annually. This frees up the business owner’s cash rather than having $75,000 tied up in a trust fund.
For the trust fund agreement, not only are these funds secured for the entire licensing period, there are also fees assessed to maintain the account.
However, if you have $75,000 you can tie up, the fee to hold the money in a trust fund is much cheaper than the surety bond premium. This makes the bond option advantageous to smaller/mid-size brokers who can't afford to post that amount of cash.
Another major difference between the freight broker bond and trust fund agreement is the handling of claims. Surety companies work with the bond agencies to resolve claims and avoid cancellation. With the frequency of false claims in the freight broker industry, the support of experienced claim specialists is critical to timely resolution.
Claims against trust fund agreements are usually settled quickly with cash from the fund and no preliminary investigation. If a claim is found to be false, payment may be returned, but this often takes additional time.
Find the Best Freight Broker Bond Program
For many brokers and forwarders, the BMC-84 bond is the only choice because of the difference in financial commitment required. It’s crucial to fully research options in bond programs, as terms and rates can vary widely. Some sureties will require personal and business financials with cash verification, years of experience and even collateral, while others will allow greater flexibility in the underwriting process.
There may also be hidden costs associated with obtaining the bond. For instance, if audited financials are required, CPA fees can run as high as the bond premium.
Look for an experienced surety agency who issues a large volume of freight broker bonds as they will have the best bond programs. Ask not only for their rates, but if there are other potential costs. Specialists in freight broker bonds will provide the best direction and help you wade through the complexities of freight broker bonding.
JW Surety Bonds is a surety bond agency offering instant online freight broker bond quotes.
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