Lachezar Stamatov, expert in the field of surety bonds and licensing, illustrates how to get and renew your freight broker bond despite bad credit history. Why is your credit score so important to surety bonds companies?
As long as people start early, getting a freight broker bond should not pose much difficulty even with bad credit.
A question that pops into the heads of many people is: ‘Can I get a freight broker bond if I have bad credit?’ Luckily, the short answer is ‘yes’, but there are several thing you need to know. For the full answer, read on.
Current Price of the Freight Broker Bond
You are probably aware of the recent increase in the freight broker bond, mandated by the MAP-21 legislation. It took effect Oct. 1st last year and it raised the price of the bond from $10,000 to $75,000. This was considered a big change, not just because of the seven-fold increase, but because the previous price had remained unchanged for about 40 years.
The FMCSA justified its decision, saying that there had been a lot of cases where shippers and carriers had been delayed (or entirely denied) payment. Since the bond is required exactly to protect shippers and carriers from that scenario, the Administration considered it necessary to increase the price.
A lot of independent, small and mid-sized brokers feared they would be forced out of business. Fortunately, that didn’t happen, partially because the FMCSA extended the compliance period by two months, so freight brokers could be matched with bonding companies and obtain the bond in time. This year, the deadline is once again Oct. 1, but there will be no extensions, so if you have bad credit, it is especially important to start shopping now.
Freight Broker Bond (BMC-84) vs. Trust Fund (BMC-85)
You may have heard that instead of the freight broker bond (BMC-84), you can also renew you license by putting money in a trust fund (BMC-85). While opting for the bond is a better idea for a number of reasons, let’s focus on why it is better if you have bad credit.
With a freight broker bond, you pay in annual premiums for each year that you operate as a freight broker. Premiums are typically a small percentage of the total amount of the bond. With a trust fund, however, you need to come up with the full $75,000 all at once and the total sum will be tied up in the fund for as long as you work as a freight broker.
This is money that you could be using for operational expenses, but in a trust fund you will not even get interest on them. In fact, you will be charged by the institution that is keeping them. But the biggest problem here is that if you have bad credit, most banks and financial institutions will be unwilling to lend you that kind of cash. Getting a freight broker bond with bad credit is much easier.
Calculating the Price of Your Freight Broker Bond
First, let’s start with a brief explanation about why your credit score is so important to surety bonds companies. The main reason for that is that they use it to evaluate the likelihood that you trigger a claim. Since bonding companies assume a zero percent loss ratio when underwriting each bond, the better your credit score is, the better the quote they will give you.
People with sound credit typically get annual premiums of between 1 and 4 percent of the total $75K. For applicants with bad credit (650 or below), the rates go up to between 5 and 15 percent. Sometimes, though rarely, the premium can be as high as 20 percent or the bonding company may require collateral before they issue the bond.
Other parts of your credit history can also make you a high-risk applicant, and adversely affect the price of your freight broker bond. Some of them are: tax liens, civil judgments, past bankruptcies, etc. There are, however, two conditions under which surety bonds companies will refuse to underwrite a bond: an open bankruptcy or a late child support payment.
A bad credit score should typically not prevent you from obtaining a freight broker bond. Our long experience shows that 99 percent of applicants obtain the bond, regardless of their credit score. And as your score improves as you sustain and develop your business, you will also pay lower premiums each consecutive year. The important thing to remember is to start looking for the bond early, because that increases your chances of getting bonded and receiving a better premium.
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