Why Freight Bonds Are Important for Trucking Businesses
The trucking industry is one of the most challenging industries to figure out. While it can be a lucrative business, there are still a lot of problems that can go wrong. It is dangerous by its very nature. That is because truckers spend hours on the road, which can lead to accidents or even worse. As someone in the trucking business, you need to be prepared every time you go on the road.
Another problem that can happen in the trucking industry is having goods get lost or stolen. It becomes an even worse problem when the property that was lost is something valuable. For example, trucks transport high-tech products and even rocket parts. These components cost millions of dollars, and some of them are even impossible to replace. Because of that risk, getting a surety bond is an integral part of being in the trucking business.
Freight bonds are a type of surety bond, and they are what you typically encounter in this industry. They are similar to traditional surety bonds, but they have specific legal responsibilities that only apply to the trucking industry.
Introduction to Surety Bonds
What are surety bonds? A surety bond is a legally binding agreement that guarantees that the company purchasing the surety bond will complete its obligation to an obligee. It gets the bond from another party called a surety. The surety is typically a department in an insurance company, but surety agencies provide the same services. These are usually the recommended options for companies looking to get a surety bond.
To recap, you have a principal, an obligee, and a surety. The principal is the trucking company. The obligee is typically the government or a person contracting the trucking company for delivery. The surety is the company providing the surety bond.
You should realize that it is there to protect others, and it is typically what other entities claim against when you fail to deliver whatever you have agreed to.
Surety Bonds in the Trucking Industry
Like the construction industry, the trucking industry requires a bond in many situations to get a contract. After all, delivering goods is a risky business for many companies. There are a few types of bonds that are specific to the trucking industry. These are:
• COD Bond
• US Customs Bond
COD Bond
Collect on Delivery bonds, or Cash on Delivery bonds, are there to ensure that the trucker can legally deliver and collect payment for goods from the receiver. You can think of it as the trucker being the errand boy. The trucker gets goods from a shipper, and they then move that freight to a consignee. This bond is there to allow them to take payment from that consignee as well.
US Customs Bond
In this bond, CBP is the obligee. The bonds exist to ensure that Customs & Border Protection can seek financial compensation if they cannot collect money due to them from the principal. An important part of this bond is that the surety company is indemnified. This means that they can come after the principal using any legal means if they have to pay out money to CBP.
Freight Broker Bond
The FMCSA requires freight brokers and forwarders to have a freight broker bond for the licensing process. It protects motor carriers and shippers when they do business with a freight broker. It is important that freight brokers don’t delay or refuse payment in an unreasonable way. The bond ensures that there is compensation to shippers and carriers. There are two types of freight broker bonds available. However, what is a freight broker?
A freight broker is simply a third-party logistics company with a license to contract with shippers and motor carriers to move freight from one location to the next. You can think of them as the intermediary between the people shipping and the actual truckers that will move the cargo. These companies are heavily regulated, and they require a special bond.
BMC-84 Bonds
This type of bond can be seen as a form of credit for the freight broker. It is going to protect the customers and trucking companies if FMCSA regulations are violated. The great news is that you only have to pay a fraction of the bond’s value every year.
BMC-85 Trust Fund
With a BMC-85 Trust Fund, you have to put $75,000 into a bank account, which the government mandates. You cannot touch this $75,000, and it is usually an option for established brokers and large firms.
What Does It Cost?
Since the BMC-85 Trust Fund bond is not practical for most newcomers, you typically have to work with a BMC-84 bond. With this bond, you usually need to pay from $900-$2,000 every year, but it will depend on your specific circumstances. For example, your business history and credit history are taken into consideration. However, it is crucial to remember that this bond lends credibility to your business, so it is not something you can go without. In certain instances, you cannot even do business legally without having this bond.
If you have the funds, the BMC-85 Trust Fund bond requires that you put up the entire $75,000 into a bank account. There might be bank fees that you need to pay after that deposit has been completed.
Applying for Your Bond
To obtain one of these bonds, you only need to fill out the application and provide your financial statements. The better your financial statements look, the lower it will cost to get your bond application approved. The provider will go through your entire financial history, which will show them whether you have the capacity to fulfill your obligations.
Freight bonds open up a new world to your trucking business, which means you won’t be competitive for too long without them. Take care of your financial history, and you have a great chance of getting excellent rates on your surety bond.
