Since the Federal Highway Bill was passed the amount you need to be bonded for has increased from $10,000 to a hefty $75,000. The increased amount is geared to help weaken fraudulent activity within the freight brokerage industry. However, this now means that getting a company to back you for the necessary amount will require stricter application guidelines and could prevent many small brokers from getting bonded. As a freight broker you are required to purchase a surety bond for your business so it’s important to know exactly what it is and what you need to obtain it.
As was mentioned, surety bonds help regulate the freight brokerage business and reduce potential financial losses for affiliated parties. The surety bond acts as a kind of insurance, except where most insurance contracts bind two parties together, the surety bond brings three separate entities into a binding contract. There is the “obligee” that requires the bond; this is usually a government agency that regulates the industry. There is the agency that issues the bond and provides a financial guarantee of your business’s ability to follow through on the agreed upon contract (this is the surety). And there is the actual individual, or business, that is required to purchase the bond called “the principle”. A freight broker falls into the “principle” category.
As the principle you should know that not all bonds are the same and each will be evaluated differently depending on the applicant. Surety bond applicants will be evaluated on several pieces of information such as credit score and personal and business financials. Because every applicant will have different information and credentials not everyone will receive the same rate on their bond. Also, depending on which bond you apply for can determine the amount or type of risks the surety company will take on. One of the major risk a surety company considers is that the principle will default and the surety company will have to pay the bond amount to the obligee. So the lower the risk on the surety bond, the lower the cost. You can get bonded for $75,000 at minimum or if you want to get more coverage you can apply for a larger bond. Many top freight brokerages carry a bond of $250,000.
Standard surety bonds rates range from 1-10% of the bond amount. Bonds deemed to be high risk can cost as much as 20% of the bond amount, while others might even require some sort of collateral be given along with the premium. Whether this has to be done or not is determined by the Surety Bond Underwriter (SBU). The SBU is the person who reviews the application and decides the risk being presented to the surety company. This can vary from one individual to another since every provider gauges risk differently. Ultimately, the surety body underwriter has the authority to accept or deny high risk applicants.
When applying it’s important to have your paperwork ready beforehand. You can work to have this ready by first contacting the agency or obligee that is requiring the bond. In the case of the transportation surety bond this would be the FMCSA. They can help you better understand what bond form you will need. You can obtain the exact form you’ll need from most surety companies, but accessing the form upfront will save a lot of time. It’s also important that all your personal and business records are easily accessible. You will need the name of your business, the penal sum (bond amount) and social security numbers and addresses of all respective owners. This is information that the bond underwriter will need in order to consider your application. Knowing what the surety providers expect will allow you to be prepared and help the application process run smoothly and as favorably for your business.
Surety bonds are not always cut and dry but knowing the proper vocabulary and preparing yourself with the right information and documentation can make it a lot easier. If you are looking for a freight agent job you can hire on with a company that already has a bond. If you want to establish your own freight brokerage you will need to follow these guidelines and make sure you obtain the proper coverage for your business. If you have additional questions reach out to the appropriate government agencies or a credible freight brokerage program that can give you the necessary information to decide which direction you want to take your company.