The smooth passage of freight brokerage

Freight brokerage is a hot potato these days. Not only because the industry is buzzing with the latest changes to federal regulations, but also because it remains an appealing line of business to many.

Until last year, freight brokers had to file a $10,000 surety bond. However, according to a new transportation bill known as Moving Ahead for Progress in 21th Century (MAP-21), which was signed into law in July, starting on October 1, 2013, there is an increase in the Freight Broker Surety Bond requirement to $75,000. Brokers who do not file the higher bonds will have them canceled. If they do not manage to secure that bond within 30 days after cancellation, they will lose their broker license.

The general reason for such a drastic increase is to prevent fraud. It is meant to protect motor carriers from delayed payment, or non-payment, as well as other possible misdeeds. Posting a higher barrier to entry might restrict freight brokers from foul practices. The downside of the increase is that smaller brokers may have a hard time qualifying for larger surety bonds and, consequently, might be pushed out of the market.

What is a freight broker?

Perhaps a brief definition will help future candidates get better oriented. Simply put, this is an individual or a company that acts as a liaison between a shipper needing to transport goods and an authorized motor carrier willing to provide that service. In other words, the freight broker is a transportation intermediary whose sole role is the movement of cargo.
Brokers usually help both ends – motor carriers and shippers. With the first, they load the trucks and are paid commission for it; with the latter, they help them find a reliable motor carrier, often a good company not so well known to the shipper. Some companies may find it easier to use brokers as their traffic department, letting the broker handle all their shipping needs.

There is, however, one fourth party that enters the picture and that’s the freight forwarder. Sometimes they are confused with freight brokers, but they have little in common. Forwarders normally consolidate a number of small shipments into a larger shipment and organize its transportation via land, air or water carriers.

How does one become a licensed freight broker?

A few words before we get to the licensing. It is relatively easy to start a freight brokerage business because, unlike carriers and forwarders, you don’t need a warehouse or a loading dock. There’s no need of an office because your customers do not have to visit an actual office in order to get what they need. A freight brokerage business, in fact, is perfectly manageable from home. But maybe it is wise to attract some reliable clients and then move to a commercial location.

Now the license application. The process is fairly easy – it’s going to take 30 minutes of your time and a valid credit card. Candidates should go to the Federal Motor Carrier Safety Administration (FMCSA) website and register there by downloading form OP-1, which is some 17 pages. Do not despair, though, most of it is instructions and only the last four pages are important. Then you need to pay the $300 registry fee by credit card in order to receive a unique number used in later references while your company is being researched.

The second and very important step is obtaining a surety bond. The bonds are required by FMCSA, and serve as a guarantee that freight brokers will fulfill their responsibilities to all parties involved. Qualification is defined by credit history, company’s reputation and financial assets.

Who will be affected by the $75k surety bonds increase?

According to Dial-a-Truck load finder service, in order to do (and stay in) business, freight brokers, carriers and, for the first time, freight forwarders will need to pay more. Moreover, if within one company there is a broker and freight forwarding service, two $75k bonds need to be posted.

How does one prepare for the surety bond increase?

If you already are in the freight brokerage business, it would be a good idea to contact a surety bond provider to get all the information available. Discuss the new provisions and how they will possibly affect your business. Will there be any financial repercussions? Many sureties require collateral for this new requirement, but collateral free options do exist for all credit types. Also, it is not a bad idea to apply to your bank for a new letter of credit. Consult your banker or accountant to make sure that you have all the assets needed to qualify.