BROKER BOND UPDATES:
Since the transportation bill became law a few months ago, I have received a lot of calls from brokers who want to understand the implications for their business. The law, dubbed Moving Ahead for Progress in the 21st Century (MAP-21), includes many provisions that affect freight brokers, but the $75,000 bond requirement has been the subject of the biggest controversy.
When concerned clients ask my advice about the new bond, I urge them to calm down. The Federal Motor Carrier Safety Administration (FMCSA) has announced that its target date for enforcement is October 1, so there is still time to prepare and to consider the options.
There is also a lot of confusion and misinformation about the bond. For example, many brokers fear that the larger bond will not be available. That simply is not true. There are sureties that are eager to provide $75,000 bonds to qualified brokers and freight forwarders.
Here are three things you need to know about the bond:
1. For the first time freight forwarders will be required to post bonds. If a company has both broker and freight forwarder authority, two bonds will be required.
2. Carriers that broker loads will be required to obtain brokerage authority and post a bond.
3. Brokers will have to increase the amount of their current bond or trust account.
It is important to understand that surety bonds are completely different from insurance policies. With an insurance policy, the insurance company agrees to pay for defined risks of loss in exchange for your premium payment. The insurance company uses its own money to pay claims. A bond is merely a guaranty, backed by the surety’s financial strength, that the broker will pay legitimate freight bills in the agreed-upon manner. The surety is not assuming risk, because it will use the broker’s money to pay those bills. The underwriting on a bond is based upon the broker’s credit history, reputation, and financial strength. That means the broker’s financial statement is crucial; it must show that the broker has the cash to reimburse the surety if there are any claims against the bond.
Here are three ways for small brokers and freight forwarders to prepare for the underwriting requirements of a $75,000 bond:
1. Talk to your accountant about improving your financial statement to support the $75,000 bond. 2. Provide a letter of credit from a bank.
3. Use the brokerage owner’s personal financial statement to support the bond.
You may find that some combination of these strategies is best for your company. You may also need to consider changing your corporate structure, especially if you are operating as a Sub-S corporation or LLC.
What’s your next step? Meet with a good accountant and a banker to prepare for the surety’s underwriting requirements, so you can secure a $75,000 bond and keep your business on a solid footing.
Mark Yunker, vice-president of business insurance agency RJ Ahmann Company, is an expert in the area of contingent cargo insurance for the transportation industry. With more than 20 years of experience, Mr. Yunker is a consultant to DAT on insurance issues.
Are you saying that a $75K insurance policy will not be accepted as a substitute for a Surety Bond? Also what would the ramification be against a Sub-S corp with this new requirement/
In 2010 when I applied for a Bond "NO INSURANCE COMPANY WOULD TOUCH IT". They all said that there had been too many Fly By Night Operations that SCAMED hard working companies. I had to put 10 Grand in a CD @ my bank! NO WAY CAN CAN HARD WORKKING SMALL BUSINESSES AFFORD 75 GRAND CASH!
As much as we were reassured that this law wasn't meant to wipe out the small brokers, it does exactly that. I just don't know much of small brokers that have an extra $75k laying around. I tried really hard to believe that this was "for the good" of all, but in reality it is for the good of "some". It might not say that on the bill, but if the result is the small broker going out of business than that's exactly the intention of the bill. And TIA sure did their part with helping their big brothers out. Wish I had better things to say.
Unfortunately, we all pay a price when scammers infiltrate an industry. And there have been brokers with good intentions that did not manage their businesses properly. In both cases, sureties have had to pay claims and were unable to recover the money.
The sureties are not blameless because their underwriting may have been lacking. In their defense, it is difficult to effectively underwrite a bond which generates such a small premium. Some sureties choose not to participate in that marketplace and others set their standards very high in an effort to avoid problems.
The new bond will generate higher premiums, which should allow sureties to do better underwriting and select better risks. There will continue to be sureties that avoid these bonds, but there will be others that will compete in the marketplace.
Will brokers have to put up $75,000? The answer will vary according to the broker’s credit history, reputation, and financial statement. In some cases, a surety may accept a letter of credit from an acceptable bank. Or they may accept a personal financial statement and indemnity from the business owner.
Following up on Bob's comment, an insurance policy and a surety bond are completely different animals. Surety bonds are usually issued by the surety departments of insurance companies, which may contribute to the confusion.
The FMCSA requires either a surety bond or a trust fund to satisfy their requirement. The FMCSA will not accept anything else and there is no insurance policy which guarantees payment.
The challlenge for Sub S corporations and LLCs is the year-end financial statement, which typically does not show enough cash to convince a surety that the owner will be able to re-pay the surety for a freight bill.
There is not much cash at year-end because accountants often advise those companies to pre-pay expenses and take draws or bonuses at the end of the company’s fiscal year. If profit remains in the corporation or LLC, it is the owner who is liable for the additional income tax.
Some Sub S corporations recognize a need to leave cash in the corporation over the years, to make their financial statements look better. It is easier for them to secure a bond. If you have a Sub S or LLC, and you haven't taken those steps in the past, it would be wise to contact a good accountant as soon as possible.
My understanding is that if a carrier brokers freight, in the future the carrier would need broker authority to continue to do that. The size of the carrier does not have any impact on this requirement.
If a broker operates trucks, motor carrier authority is required. If the broker does not operate trucks, then no motor carrier authority would be required.
The intent is to clarify the transaction. If an entity is acting as a broker, the entity should have broker authority. The goal is transparency so all of the parties know what type of entity they are dealing with and what activity that entity is engaged in.
There is a federal regulation that says a broker may not represent its activities to be that of a carrier.
If you have questions about whether these laws apply to your business, I recommend speaking with your attorney.
re andre's comment. I believe you are 100% correct: They TIA went along with the big guys with the money. What should be done is all some brokers should quit the tia and go somewhere else. They sold us small guys down the drain
re surety bond financial streingth. I was doing busines with a broker who had a 10,000 bond. the broker went bust and call his surety out of 14,000,00 i redeive 3200.00 the surety is misleading a believe all brokers shoud have full cargo
I just spoke to my bond provider and they stated that nothing is in stone yet. Is that true do we have a solid amount? do we have a drop dead date/
The amount is set at $75,000 and that amount is in the statute.
The law was passed on 7/1/2012 and was enacted effective 10/1/2012. The law says the bond and other provisions relating to brokers, freight forwarders, and motor carriers take effect one year after enactment. That would mean the provisions take effect on 10/1/2013.
So both the amount and the date are set. Some sureties are unclear on this, but the dates and the amount are set by the statute.
The new law is wonderful for carriers. After being burned by 11 brokers within the last 6 months, we will now at least have a chance to collect on monies owed. After all, bond claims are first-come, first-serve, so if you get in too late, you are dead in the water. Carriers are required insurance, brokers can move $100K worth of freight, while having a $10K bond.
Everything makes sense except for one sentence: "You may also need to consider changing your corporate structure, especially if you are operating as a Sub-S corporation or LLC."
This needs to be explained in more detail to make any sense of it.
John, I would advise any broker in this situation to discuss the issues of various corporate structures with an accountant or tax advisor.
It is a Dang Shame thousands of Small Business Brokers whom have proved themselves and have been in business for several years to have to re-Qualify to obtain More Insurance and or Bonds. But you tell me any dang Bank that will give a Good Truck broker a $75,000 line of credit and I will stand and laugh with you! We Have the best credit The Issue is will the FMCSA grandfather the good guys? NO because it takes money from CH Robinson Worldwide and companies like them, they are the biggest supporters of this kind of crap The Obama White houe has fell for! Sold Out By Our Own President!
Doesn't the FMCSA have to come up with the language and send out information to the brokers so that they know what is required before the deadline of Oct? From what I was reading, if they don't have the language set about what is required then nothing will be required.