Freight Broker Bond or a Trust Fund? How to Choose
Whether you’re opening a freight brokerage, or simply renewing your freight broker license, you are faced with an important decision: should you get a freight broker bond (BMC-84), or establish a trust fund (BMC-85)? Both of them will satisfy FMCSA’s pre-licensing requirement, aiming to provide protections to shippers and carriers.
But there is a lot more about both options that you need to know, in order to make an informed decision that best suits your individual needs. For that purpose, let’s delve into more details about each option.
What is a Trust Fund (BMC-85)?
Think of the trust fund as a bank account to which the FMCSA has access. You must have $75,000 in the trust, and keep it there for as long as you maintain a valid freight broker license. The FMCSA can make use of the money, in the case of a claim against you.
This option may sound attractive at first, but has several things to be considered. The most important one of them is that it ties up a large sum of money, which could otherwise be used as working capital or for investment purposes.
Many small brokers would not have access to so much money in the first place, meaning they may have to take a loan and pay interest on it. This can be bad news for anyone with a less-than-perfect credit score. Not only will they have to pay a higher interest rate for the loan, but the trust fund itself will further impact it in a negative way. Another thing to consider is that the bank will be charging maintenance fees, but no interest will be paid on the funds while kept there.
A final thing to keep in mind is that with a trust fund, you are on your own, both financially and legally. A freight broker bond is backed by a bonding company with its own liquidity, which can help repay claims and even help you fight the claim if it believes you are not at fault. Let’s see how freight broker bonds actually work.
What is a Freight Broker Bond (BMC-84)?
A freight broker bond is a type of surety bond that guarantees protection to shippers and carriers, in case a freight broker fails to pay them or use fraudulent business practices. The bond also guarantees the FMCSA that you will abide by state and federal laws and regulations.
The freight broker bond acts in the same way insurance does, although it shouldn’t be thought of as insurance for your business. There is a total bond amount for which shippers, carriers and the public are insured, and then there is a premium paid for the bond each year. The protection is provided by the surety bonds company which underwrites the freight broker bond. If a violation is established, the victim can file a claim against your bond which you should pay if found guilty.
The freight broker bond premiums are a small percentage (could be as low as 2%) of the total $75,000 freight broker bond amount. In other words, you do not need to have that much cash on hand. Even brokers with bad credit scores can usually obtain a freight broker bond.
The key to getting bonded is to choose a well-funded and trusted surety provider. If choose this option, you want to be sure the FMCSA will accept your freight broker bond. A good advice is to make sure your bond comes from a bonding company which is A-rated and T-listed.
For many freight brokers, the flexibility and protection the bond provides over the trust fund makes it the preferred option. Unless your freight brokerage has a great amount of liquidity, a freight broker bond might be your best bet.
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps freight brokers get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.