A new federal law that requires freight brokers to post $75,000 surety bonds went into effect in late 2013. The law’s purpose is to weed out corruption in the freight brokerage industry. It also provides more financial protection for carriers victimized by brokers who do not pay them.
The $75,000 bond requirement discouraged at least 10% of the nation’s freight brokers from renewing their licenses for 2014. However, the new law is not expected to remove all unscrupulous brokers from the business. Trucking companies must take precautions to ensure they are protected when working with new brokers.
Weeding Out Bad Brokers
In 2012, President Obama signed the Moving Ahead for Progress in the 21st Century (MAP-21) highway funding bill. One of the bill’s biggest measures was to increase the surety bond that freight brokers must post to renew their licenses from $10,000 to $75,000. The bond serves as a guarantee that a carrier will be paid for a load that it delivers for a broker.
Advocates hailed the new bond requirement as a key step in cleaning up freight brokering. While third-party-logistics is a $160 billion business, the industry still has small brokers and freight forwarders who pay their carriers late or not at all. The $10,000 bond made it easy for a broker to set up shop. It was also not much of an incentive for trucking companies to file claims on unpaid shipments. Beefing up the bond requirement to $75,000 gives trucking companies a better chance of collecting part of what they are owed from a bad or out-of-business broker.
Carriers must be Careful
While MAP-21 has strengthened the bond requirement, there are still brokers out there that are bad credit risks. Here are five steps your trucking company can take to reduce the risk of working with an unreliable broker:
Ask questions. Three things you need to know before working with any broker: Do they have the $75,000 bond, how long have they been in business, and how are they going to pay you? You should also request two or three business references and ask if the brokerage provides other services. For example, many brokers also run their own trucking companies.
Check the broker’s history. A quick Internet search should reveal the broker’s MC number, DOT number and other information. From this you can find out how long the brokerage has had an active authority, its insurance carrier and other useful information. Much of this information can be found on the Federal Motor Carrier Safety Administration’s website.
You can also check the broker’s credit rating and days-to-pay information with a third-party resource. RTS Credit Service, an affiliate of RTS Financial, monitors payment and credit information on more than 50,000 brokers and carriers.
Negotiate payment terms. Explore your payment options with the broker and insist on reasonable terms. Many reputable brokers pay within seven days and also offer Quick Pay for a small (usually 1.5%) fee. You can also require the broker to send payments to you once they have been paid by the shipper. Avoid payment terms that allow the broker 30 or more days to pay you for a delivered load.
Listen to your gut. Pay close attention to the way a brokerage conducts business. How do the brokers answer the phone? Are they professional and easy to reach? Does the brokerage have a website, and what does it look like? An experienced freight brokerage cares about maintaining its outward appearance and building relationships. It does business differently from, say, a trucking dispatcher who is brokering loads on the side.
Watch your credit. When a brokerage goes belly-up, the $75,000 bond is distributed pro-rata among the claimants. In this situation your trucking company is guaranteed only partial payment of what it is owed. You can guard against lost revenue by diversifying the number of brokers that work with your company. You can also establish limits on the amount of credit you will extend to each broker.