Many people want to know if Freight Brokers need a Surety Bond and a Trust Fund or Just one or the other. So, should you obtain a Freight Broker Surety Bond or Trust Fund?
Before we continue, let us first understand what a Surety Bond and a Trust Fund are.
Surety Bond (BMC-84)
What is a Surety Bond? A Surety Bond is an agreement between three parties, the Principal, the Surety company, and the Agency, that requires the Principal to obtain the Surety Bond before performing a task or working. The purpose of this written agreement is to guarantee the performance, compliance, or payment of an act that was performed.
Principal: In transportation, the Principal is the party that will purchase the Surety Bond and then undertakes an obligation to perform tasks.
Surety Company: The Surety Company is the insurance or surety company that will guarantee acts will be performed by the Principal. If the Principal does not perform or complete tasks as promised, the Insurance or Surety Company will be contractually liable for loss(es) that occurred.
Agency: The company that requires the Principal to obtain the Surety Bond before performing tasks or working. The Agency is usually a local, state, or government entity.
There are thousands of Surety Bonds across the United States of America; they have different meanings, requirements, variations, etc.
Trust Fund (BMC-85)
What is a Trust Fund? A Trust Fund (BMC-85) is a trust account managed by a Trust custodian that holds at least the minimum $75,000 freight broker security required by the FMCSA. Money deposited into a Trust is similar to an Escrow, where money and property are held. In the transportation industry, a Trust is set up to pay claims to the Motor Carrier and the Customers should claims be filed against the Freight Broker.
Trust Funds give you a little more leverage than Surety Bonds, but they are both great options for the Freight Broker.
Pros & Cons
Pros Surety Bond:
Surety Bond companies will more than likely investigate claims since they share liability
You will pay a percentage of the required $75,000 coverage
Pros Trust Fund:
Low-cost down payments and premiums
Can pay monthly, quarterly, or yearly
Bad Credit Welcome
Cons Surety Bond:
You must pay the entire amount upfront
You must have collateral if you have bad credit
Cannot finance most surety bonds
You may need a cosigner with bad credit
May need tax returns to show the financial health of the company
Cons Trust Fund:
Some companies may not investigate claims thoroughly
You may have to complete many steps to set up the Trust account
A Trust Fund will be your better option; many Surety Bond companies will say they are the better option, but in reality, they are not. If a Surety Bond company quotes you $5k for a Surety Bond, you must pay the $5k upfront before the policy becomes active. If a Trust Fund company quotes you $5k for a Trust Fund account, you will have the option to finance that $5k with a down payment and monthly, quarterly, bi-yearly, or yearly payments to settle the balance. If you are a startup or seasoned Freight Broker, a Trust Fund will be your best option financial-wise. If you conduct legit business, you will not have to worry about claims on your bond or trust account; claims are rare. Most claims happen when a Freight Broker does not pay the Motor Carrier. The shipper may file a claim if they determine the Freight Broker has engaged in double brokering or other fraudulent activities.