This financial drama needs to be resolved
By Timothy Brady

Can’t live with them and you can’t live without them; sounds like something you’d find in a tabloid newspaper about the most recent on-again, off-again Hollywood couple. In fact, it can be also said about the turbulent relationship between freight brokers and carriers. It seems as if they are constantly pointing fingers at each other, accusingly saying “Cheap freight, Low freight rates” are all the other guy’s fault. 

Then there’s the issue of getting paid--freight brokers carry a fiduciary responsibility to both the shipper and to the carrier. Brokers are responsible for collecting the hauling fees from the shipper and distributing them to the carrier. Herein lies where the problems arise in this relationship: when the broker is slow to collect from the shipper and is slow to pay the carrier, or when the broker collects from the shipper and fails to pay the carrier. Now in all fairness, there are also problems which stem from the carrier side, such as failure to pick up or deliver within agreed parameters, or other service issues. But in this post, I’m going to tackle the money exchange problem.

Now enters the US Congress and newly proposed legislation called the Motor Carrier Protection Act of 2010. Here is a link to the entire proposed legislation: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s3483is.txt.pdf

This bill does address many of the problems faced by carriers in getting paid from a freight broker after they have delivered a load.  But does it solve them? A portion of the proposal requires a broker to post a bond of $100,000 and it must include a cash bond of $10,000. This is regardless of the size of the brokerage or the number of offices it has. In other words, the broker with 100 offices in 48 states generating $100 million in freight revenue, with $25 million in outstanding accounts payable to carriers, has to have exactly the same bond amount ($100,000) as the wife of a trucker who operates a brokerage from her home so she can broker out the freight her husband doesn’t have the capacity to haul. Let’s say she generates $100,000 per year in brokered freight revenue, and at any given moment she has $25,000 in outstanding accounts payable to carriers. Granted, both brokers have a fiduciary responsibility to their shippers and carriers. But if she gets mad at her husband and she and the guy who mows the lawn  run off to the Caribbean with the $25,000, the $100,000 bond will more than cover the outstanding monies due carriers. On the other hand, if the CEO and CFO of the multi-office brokerage run off with $25 million, where will that leave the carriers to which that huge broker still owes money? $100,000 isn’t even a drop in the bucket.

We’ve learned over the past two years with mortgage brokers who had fiduciary responsibilities to their clients and took off with billions, or Bernie Madoff and his Ponzi scheme or Arrow Trucking who allegedly shut down with less than 8 million in assets and owning over $100 million that just by raising the bond amount  it isn’t going to change the risks a carrier takes when hauling loads through brokers on credit.  It doesn’t address the core problem of what happens to the carriers’ monies once the broker has been paid by the shipper. In other fiduciary responsibility industries (real estate brokers, insurance brokers and yacht and ship brokers), the broker has to set up an escrow fund where the brokerage operating funds can’t be co-mingled with the monies held in trust for their clients. When the money is distributed there is a precise accounting of every penny. The broker gets paid his fees when the money is distributed by a check written to the brokerage from the escrow account. The safeguards in this system are far reaching and while not impossible, it is far more difficult for any broker to run with the funds. Escrow accounts are managed by a bank, not by the broker.

While the bond does need to be increased on all freight brokers to make them more accountable, it needs to be raised in an equitable manner whereby the amount of the bond required is equal to the outstanding accounts payable plus 10% at any given time. Also, by having freight brokers place all freight payment funds they receive into an escrow account similar to what real estate brokers are required to do, it would help eliminate the stealing of the carriers’ portion of the funds more than any bond increase could ever address.

No one company is too big to fail; we’ve learned that painful lesson over the past 18 months. Let’s be sure any new regulating of the industry actually addresses and solves the problems and doesn’t create new ones. Putting thousands of small freight brokerages out of business will only make the current problems carriers are having even worse.

Good loads and good roads, everyone. 
Timothy Brady  © 2010
www.timothybrady.com 
731.749.8567