Changes in brokers' bonds directly affect small motor carriers too.
By Tim Brady 

Currently over 15,000 freight brokers are licensed by the FMCSA. There is a call by a couple of different trucking interest groups for the freight brokers’ bond of $10,000 to be increased to $100,000 or even as high as a half-million dollars. These groups contend that if raised high enough, it will reduce the number of fraudulent freight brokers.

What I find most interesting about this call to raise the broker bonds by as much as 50 times the current amount, it will put the vast majority of freight brokers out of business. Annual premiums by a bonding company for a $10,000 bond is about 10% of the bond amount or around $1,000. If the bond amount was increased to $100,000, the premium would be between $7,000 to $10,000 per year; if it’s increased to $500,000, the rate could easily jump to $35,000 to $50,000 per year.

What would this do to the freight brokering industry? If the bond amount goes to six figures with a five-figure annual bonding premium, the small motor carrier would be left with only a handful of gorilla-sized brokers. And that means this elite group of freight brokers would easily control the hauling rates trucking companies receive.
In other words, one problem would be replaced by a much bigger problem: a small group of large freight brokers controlling the revenue of the trucking companies who use them. 

A pastor once told me, “Be careful what you pray for; you might get it!” This I believe is a viable warning in the case of increasing broker bonds to six figures. Placing a higher required bond on all brokers to weed out the bad apples will force people who have legitimate brokerage businesses out of the market. The effect on the market will be devastating.

The biggest problem with the fraudulent brokers is that motor carriers and shippers who do business with them fail to do due diligence in investigating them.

A higher bond won’t deter a person who is out to cheat and steal. If they are successful in cheating carriers and shippers using their usual method of operations, they’ll continue to change their corporate name, shop around for bond coverage and be back in business again. All that a tremendous increase in the freight broker bond will do is shrink the number of brokers down to those who can afford to pay five-figure bond premiums.

Can you imagine what would happen to small motor carriers if insurance costs suddenly shot up 10 to 50 times in a single increase? The vast majority would be out of business the next day. You think freight rates to small carriers are in the tank today? Put 90% of the current 15,000 freight brokers out of business, leaving only the biggest brokers, and you’ll be praying for today’s rates to return.

I think there is a better way to handle the situation that doesn’t put a large number of small, honest business people out in the street.

The largest and most persuasive means is for the FMCSA to set up a broker tracking system similar to the CSA2010 for motor carriers, but instead of following safety infractions, they track financial viability and complaints of fraud. Create a set of rules and regulations so that if someone is convicted of fraud, he cannot be associated with a freight brokerage in any way, shape or form. Create a data base much like a credit bureau rating system, so a motor carrier can check the credit standing and pay history of a broker with just a couple of mouse clicks.

The people advocating these large bond increases are attempting through financial intimidation to stop fraud. This solution really won’t work. The theory that ‘if you control guns, only criminals will have guns’ holds true here. What needs to be implemented is more oversight: specific guidelines for the bond insurance community controlling who can get a freight broker bond. And the laws and regulations already on the books concerning fraud need to be enforced.

Finally, the real responsibility falls to the carriers and shippers. The idea that one can prevent fraudulent freight brokers from doing business by increasing their bond is about as likely as criminals wouldn’t have guns if guns were outlawed. Carriers and shippers need to have definitive guidelines to determine who they are doing business with. Every time a carrier extends credit, for 1 day or 60 days, they become a lending bank. They need to do the same credit and business practice investigation any bank would do. The less time your small carrier spends on this investigation, the greater the risk you’ll lose money on the haul.

Give credit only where credit is due. Whenever you allow a broker to pay on credit, you become a lender. If done with limits and controls, issuing credit can be an effective revenue enhancer. Done on the spur of the moment with someone you’ve never done business with before, will most likely lead to a financial nightmare.

So what’s a good way to avoid making that nightmarish hauling mistake? Your best bet is to work with a reputable factor or accounts receivable financing company. In order for the factor to buy your broker accounts receivable, the broker must meet the factor’s criteria. And the top factors know who is a pay risk and who isn’t–it’s their job to know this. They have the investigative and legal team to know if this new opportunity is too good to be true or if it’s really the opportunity of your trucking career.

Trucking is difficult enough to make financial ends meet; your best bet is to have all the financial and pay information possible. And until the FMCSA gets their act together to track fraudulent freight brokers, your best bet is to work with someone who already does, and whose existence depends on having the correct information. Only a fool parks his truck in the darkest corner of the truck stop and walks between trucks to get to the building. If you’re assuming each broker you work with will pay as agreed upon without checking out his credit worthiness and ability to pay in a timely manner, you’re the one putting yourself and your small motor carrier at risk. Put the right financial security team together, and you’ll reduce that risk substantially.

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