Freight brokers are the oil that makes the engine of global logistics run smoothly. These logistics professionals work hard to connect shippers and carriers and keep supply chains moving. Without freight brokers, businesses would have a much more difficult time coordinating their shipping and finding carriers to move their cargo.
However, with such an important role to play, freight brokers must be especially careful to operate legally and ethically. In fact, the Federal Motor Carrier Safety Administration mandates that freight brokers obtain BMC-84 freight broker surety bonds to provide a financial guarantee for their obligations. What is a BMC-84 freight broker bond, and how does a broker go about obtaining one? We’ll talk about the answers to these key questions below.
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What Is a Surety Bond?
What is a surety bond, exactly? Let’s start by establishing the basic principles of these important contracts. Here are the facts you need to know:
- A surety bond is a legally binding three-party contract.
- The parties to a surety bond are called the principal, the obligee, and the surety.
- The principal is the party that purchases the bond, the obligee is the party that requires the bond, and the surety is the party that guarantees the bond.
- If the principal breaks the terms of the bond contract, the obligee, or, in some cases, another party, can file a claim against the bond, which the surety will investigate as a neutral party.
- If the surety finds the claim valid, the principal will have the opportunity to pay the claim themselves. If the principal is unable or unwilling, the surety will pay the claim instead, up to the penalty sum—a pre-set amount specified in the bond.
- The principal is required to pay the surety back for any money that the surety pays for a claim filed against the principal’s bond.
Now that we know what surety bonds are, it’s time to examine the importance of surety bonds to the freight brokerage industry.
Why Do Freight Brokers Need Surety Bonds?
So, why does the FMCSA require freight brokers to obtain surety bonds? Freight brokers take responsibility for many important aspects of the logistics process, so it’s crucial that they operate ethically and obey the law.
A freight broker surety bond protects other businesses against certain violations that a broker might commit. Some of the actions that can trigger a freight broker surety bond claim include misappropriating a shipper’s funds, failing to pay a carrier for cargo shipped, or otherwise failing to fulfill the terms of a contract.
It’s worth noting that a BMC-84 freight broker bond is not the same thing as insurance. A freight broker bond is designed to protect your clients and creditors rather than your business, so a broker needs to separately obtain any relevant insurance coverage, such as liability insurance or cargo insurance.
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The FMCSA’s Freight Broker Surety Bond Requirements
The Federal Motor Carrier Safety Administration (FMCSA) is the organization that regulates freight brokers in the U.S. They require freight brokers to fulfill one of the following two requirements before the broker can obtain a U.S. freight broker license:
- BMC-84 Freight Broker Bond: A $75,000 surety bond
- BMC-85 Freight Broker Trust: A $75,000 trust fund held by a bank
For many freight brokers, a BMC-84 surety bond is a better option because it requires a commitment of fewer financial resources than a BMC-85. Here’s why:
- A BMC-85 typically requires the full sum of $75,000 to be deposited into a trust fund, and the business can’t withdraw, invest, or otherwise use those funds.
- A BMC-85 offers a freight broker fewer options for having a claim investigated.
- A bank will typically charge an annual fee for maintaining a BMC-85 trust fund.
In contrast:
- A BMC-84 surety bond only requires the freight broker to pay the surety a portion of the penalty sum upfront as a premium. For a small business or new business, in particular, this is an attractive option because it allows them to avoid tying up capital in a trust fund that could otherwise be used for startup and operating expenses.
- The surety has a shared interest in avoiding frivolous claims and, thus, will typically investigate claims thoroughly.
- Aside from the surety bond premium noted above, BMC-84 surety bond buyers typically are not subject to any additional fees.
How to Get a Freight Broker Surety Bond
These are the steps that a freight broker will need to take to obtain a freight broker surety bond:
- Find a surety that offers BMC-84 surety bonds. This could be an insurance or surety company, or it could be a surety bond broker that works with a network of multiple surety bond producers.
- Contact the surety, provide them with your basic information, and request a BMC-84 surety bond quote.
- Using the information you’ve provided and other public records, the surety will perform an underwriting process on your business. This underwriting process will include your credit score, criminal convictions, previous surety bond claims, and other factors that may raise your perceived risk.
- The surety will send you a quote for a surety bond premium based on their underwriting assessment.
- You can choose to pay the premium or continue to shop for surety bond quotes. Once you accept a quote and pay the premium, the surety you choose will write your bond and send you the appropriate BMC-84 forms to sign.
- Your surety will file the bond paperwork electronically with the FMCSA. Make sure to keep copies of all relevant documents for your records.
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Of course, getting a freight broker surety bond is just one step in the larger process of how to get a freight broker license. Following every step of the freight broker licensing process is crucial to ensuring that your business is properly credentialed and ready to compete in the global logistics marketplace.
Chris Mcdonald has been the lead news writer at complete connection. His passion for helping people in all aspects of online marketing flows through in the expert industry coverage he provides. Chris is also an author of tech blog Area19delegate. He likes spending his time with family, studying martial arts and plucking fat bass guitar strings.