BMC-84 Surety Bond Vs BMC-85 Trust Fund
When setting up a freight brokerage, securing either a BMC-84 Surety Bond or a BMC-85 Trust Fund is a necessity and one of the initial steps in beginning in securing a Federal Motor Carrier Safety Association approved freight brokerage license.
This process can be a source of confusion for companies and many debates take place as to which choice is better. In this guide, we explain what a BMC-84 Surety Bond and BMC-85 Trust Fund are and the differences between them to enable you to make the right choice for your freight brokerage.
BMC-84 Surety Bond
The BMC-84 Surety Bond is also referred to as a Freight Broker Surety Bond and became a legal requirement in 2013. It illustrates the financial responsibility of freight brokers across the United States and also guarantees payments being issued to shippers or motor carriers if a company does not operate within agreements and contracts.
This type of bond is a legal requirement by the Federal Motor Carrier Safety Association for any transportation broker, or freight forwarder, in the United States and acts as proof that a company is a licensed freight broker. Essentially, any company involved in transporting household goods, motor cargo, or freight is required to have such a bond. Bonds must be filed prior to the issuing of a freight broker license being issued to a company.
This bond covers affiliates of a transportation broker to a total bond sum of $75,000 for any successful claims. The bond is similar to a type of credit specifically for freight brokers and it is there to protect both the customer and the transport companies from huge possible losses as a result of Federal Motor Carrier Safety Administration regulation violations.
The cost of a BMC-84 surety bond is influenced by several factors but prices usually start from approximately $750 and range anywhere up to $9,000 and this fee is charged annually. Prices are usually higher for companies with a bad credit history. To get an accurate estimate it is best to speak with a surety bond agency that has been authorized by the US Department of Treasury.
Failure to renew bonds can result in broker authority being stripped from a company by the Federal Motor Carrier Safety Administration. This will greatly affect the company as they will not be able to renew operating licenses meaning business will be affected.
If you are considering a surety bond, choosing a company that can act as a Managing General Underwriter can be useful as they will have the knowledge to show you how to avoid claims firstly and then having everything under the one roof would speed up a claims process.
BMC-85 Trust Fund
The BMC-85 Trust Fund is also a legal requirement by the Federal Motor Carrier Safety Association for any transportation broker, or freight forwarder, in the United States. With this trust fund, a freight brokerage is required to pay a total sum of $75,000 into the trust fund. Once the payment has been issued into the fund the company cannot access these funds.
Most large freight carriers and brokers would get a BMC-85. The initial upfront cost is extremely high and so companies that are just starting out would not be able to afford this type of trust bond.
Fees are collected annually and they tend to start at $1,500 and range to multiple thousands of dollars. There is also the initial $75,000 that must be put in the trust fund. This payment can be made in cash, which is called an Irrevocable Letter Of Credit. Such letters can also be applied for on a company’s behalf by the trust company for a set fee.
Due to the fact that trust companies have less liability when they are paying a claim, claims are not as thoroughly investigated as they would be when being processed through a surety bond agency.
BMC-84 Surety Bond Vs BMC-85 Trust Fund
There are only a small number of similarities between the BMC-84 Surety Bond and the BMC-85 Trust Fund. The main similarity is that they are both legal requirements by the Federal Motor Carrier Safety Association.
They also both protect customers that may not have obligations met by a freight brokerage and ensure that they are paid in a timely manner. They do not however act as protection for the brokerages themselves who still have full liability for such instances.
The initial costs are often a reason for companies choosing one option over the other. Most large companies that have the revenue to afford to place $75,000 into a trust fund tend to go with that option. Time is money for such companies and, as mentioned previously, the claims process runs quicker through a trust company.
Smaller companies tend to choose a BMC-84 Surety Bond as the annual fees are often lower and claims are investigated in more depth. For these smaller companies claims can result in bad press or ultimately end in the company closing.
Regardless of whether you choose to go with the surety bond or the trust fund at the end of the day your company will be held to pay claims that have been found to be valid. With the trust fund, the claims money is taken directly from that mass of cash but your company will be responsible for paying back the claim amount to the surety bond agency over a period of time.
With a surety bond, companies are responsible for paying back any claims money that the surety bond agency pays out over a period of time. Obtaining future surety bonds is affected by claims made against you and so most companies try to resolve any issues before they reach the claims stage.
Final Thoughts
Once you decide whether a trust fund or surety bond would be best suited to your company’s financial situation, the rest of the necessary steps can be followed to procure a license and begin to legally operate as a licensed freight brokerage.