As October 1 approaches, some freight forwarders may need to renew their freight forwarder bond. While that is not the renewal deadline for all forwarders, many of them renew around that date as the requirement to get bonded was introduced back in October 2013, and applied to those who were in business then.
With the deadline approaching, freight forwarders may be asking themselves what they can do to reduce the rate at which they obtain their BMC-84 freight broker bond? Bond rates can vary from year to year and depend, to a large extent, on the actions of bond applicants.
Here is an overview of the bonding requirement followed by some tips on how you can lower the cost of getting bonded.
Why Freight Forwarders Require a Surety Bond
Surety bonds are a means to guarantee that a bonded person or business will comply with the laws and regulations that govern their industry. In the case of freight forwarders, a surety bond ensures that they will comply with all the contractual obligations they have towards the carriers and shippers they work with. This includes how freight is handled, how and when it arrives at its destination, etc.
In cases when a freight forwarder violates these conditions due to malpractice, negligence, dishonesty, fraud or otherwise, a claim can be filed against their bond. When a claim is filed, compensation can be requested by the party that has endured losses or damages as a result.
Such compensation is extended by the surety company which backs the bond but must ultimately be borne by the bonded freight forwarder. When compensation is extended by the surety, the freight forwarder must repay the surety in full.
How Freight Forwarders Can Reduce the Cost of Their Bond
The cost of all surety bonds is determined on the basis an applicant’s credit score. After looking at the credit score, sureties also consider other aspects, such as financial statements, liquidity, and assets as well as personal factors such as industry experience and record.
To improve your freight forwarder bond rate, you must improve any number of these factors with credit score being the most important. This year, many brokers and forwarders may find their rate improving automatically. As of July 1, credit scores will not be influenced by tax liens and civil debts. This, in turn, means that many scores will improve themselves.
One thing you can do immediately is to request your free annual credit report to check if such items have been removed from it. This will ensure that you get the best rate possible based on your current credit score. Beyond that, here are some tips how you can further improve your bond rate.
1. Raise Your Credit Score
Improving your credit score is the number one thing you can do to improve your bond rate. Improving your credit score happens by eliminating negative items in your credit report that drag down your score. With tax liens and civil debts out of the picture, you need to look at other factors that influence your credit score negatively. These can be:
- Regularly reducing any debt you currently owe
- Following up on late payments, and paying bills on time
- Paying off debt instead of shifting it around
- Keeping credit card balances low
- Reducing the total number of credit cards you are using
2. Improve the Rest of Your Financials and Showcase Your Experience
Eliminating certain items in your credit history may take a while. Even if your credit score is slow to pick up, you can still work on improving your other financials, as well as showcasing your professional experience to your surety.
Strong financial and business statements are another important factor that influences bond rates. Have a certified CPA help you with preparing your financial statements to meet the requirements of your surety company.
Along with your financial statements, have the CPA also help you prepare a schedule of managing general and administrative expenses. This provides the surety with a sense of how you manage your finances, which is an important piece of information when a bond is issued. Moreover, showcasing any liquid assets you have and providing cash verification can also tilt the scales in your favor.
If you’re not new to the industry, you can also make use of your professional record to influence the surety’s decision. The longer your history and the better your record, the more a surety will deem you ‘safe’ to be bonded, and your rate is likely to drop. If you have something to show, don’t hesitate to let the surety know!
3. Carefully Pick Your Surety Agency
If you’re new to the industry and this is your first time getting bonded, you need to know that rates on surety bonds may vary from one surety agency to the next.
Surety agencies work with surety companies to offer bonds to the public. Different agencies have access to different ‘markets’ and thus can offer varying rates to their clients. Generally, the more companies an agency can contact for a quote, the higher the chance for you to get the lowest possible rate.
Agencies also vary in the type of companies they work with. When picking your agency, look for one that works with A-rated and T-listed sureties. These companies are the most reliable ones, having been approved by the Department of Treasury and A-rated by the A.M. Best insurance rating company.
How Did You Improve Your Rate?
Have you improved your freight forwarder bond rate before and have some useful advice to share? Leave a comment below that can be useful to other freight brokers looking to improve their bond rate!