Key Differences Between Freight Brokers and Freight Forwarders
Both freight brokers and freight forwarders help arrange the transportation of cargo, but they do it via different methods and occupy different niches in the freight industry.
Between trucks, freight trains, sea vessels, and airplanes, businesses move $106.2 billion in freight through North America per year. Freight forwarders and freight brokers are key players in this vital and complex market. Both freight brokers and freight forwarders help arrange the transportation of cargo, but they do it via different methods and occupy different niches in the freight industry.
It can be difficult to accurately distinguish between the roles of a freight broker and freight forwarder, and the terms are often used interchangeably. However, there are significant differences between freight brokers and freight forwarders. For parties interested in entering the freight sector and for shippers searching for the right transportation options for their cargo, it's important to know how to distinguish these differences.
Surety Bonds Direct works extensively with both freight brokers and freight forwarders to find the best rates on freight broker surety bonds and freight forwarder surety bonds. This guide will help illuminate the differences between freight brokers and freight forwarders, as well as provide key facts about the BMC-84 surety bonds that are important for both freight brokers and freight forwarders.
What Is a Freight Broker?
Freight brokers are businesses that act as intermediaries to arrange and plan the transportation of goods. Freight brokers are contracted by shippers to work with third-party businesses, such as freight carriers and freight forwarders, to coordinate and negotiate how and when cargo will be transported. But freight brokers don't take possession of the goods being shipped, and they don't own any of the vehicles or equipment (such as trucks, trains, or cargo containers) that are used to ship the goods.
A freight broker usually doesn't prepare paperwork for their clients or ship goods under their own bills of lading. Freight brokers also typically don't provide additional services such as break bulk, consolidation, or packaging. A freight broker's job is to make the arrangements, and the freight forwarders and carriers that handle the cargo do the rest.
What Is a Freight Forwarder?
Freight forwarders perform some similar services to freight brokers in that they arrange the transportation of a shipper's cargo by contracting with third-party carriers to ship freight. Like freight brokers, freight forwarders usually do not own carrier assets (such as trucks or trains) used to transport freight. However, freight forwarders also take an active role in the preparation and shipment of a shipper's cargo in ways that freight brokers do not.
Freight forwarders often perform a wide range of services for their clients. These services can include packaging services, warehousing, consolidating shipments, and preparing customs paperwork. Freight forwarders ship under their own bills of lading (called house bills of lading or HBLs). Freight forwarders also often own their own fleet of containers that they use to prepare cargo for shipment.
Freight Broker vs. Freight Forwarder
With the definitions of freight brokers and freight forwarders established, it's helpful to place them in direct comparison and examine their differences. What are the principal differences between a freight broker and a freight forwarder?
- A freight broker acts as an intermediary between the shipper of the goods and the freight forwarder or freight carrier, without ever taking possession of the freight itself. A freight forwarder arranges transportation through third-party carriers, but takes possession of the freight and uses its own resources to provide storage, handling, packaging, consolidation, and paperwork.
- A freight broker typically only arranges the transport of freight within their home country. In contrast, many freight forwarders operate internationally and have been granted authority by the Federal Motor Carrier Safety Administration (FMCSA) to arrange the transportation of goods across international borders.
- A freight broker ships goods under the bill of lading provided by the cargo owner. A freight forwarder, on the other hand, ships goods under its own bills of lading, known as house bills of lading.
- A freight broker often has a reduced level of legal liability for the shipper's goods, since the broker never takes possession of the cargo (although freight brokers must still carry liability insurance). A freight forwarder assumes greater legal liability for the cargo, including the responsibility to insure it. In practice, these liability issues contain many legal gray areas, and liability for cargo claims against freight brokers is often negotiated through courts and insurance companies.
Some overlap exists between freight brokers and freight forwarders, and some businesses may operate as both a freight broker and a freight forwarder. Additionally, some businesses may provide the services of a freight broker, freight forwarder, and freight carrier all in one if they also own the vehicles used to transport the goods.
Freight brokers and freight forwarders are both important elements of the global supply chain. Since businesses entrust freight brokers and forwarders with their most valuable cargo, it's important that brokers and forwarders register with government authorities and provide financial guarantees for their performance and their compliance with relevant regulations.
Registering with the FMCSA
In order to operate lawfully within the United States, a freight broker or freight forwarder must register their business with the FMCSA and receive one or more of several types of licensing. The basic steps of the freight broker or freight forwarder registration process are as follows:
- Determine which types of FMCSA operating authority the business is required to obtain. This can include a Motor Carrier (MC) number, a U.S. DOT number, or a Hazardous Materials Safety Permit Registration, depending on which types of cargo the business works with.
- Use the FMCSA's Unified Registration System to apply for all necessary credentials.
- Meet freight broker surety bond requirements by providing documentation of either a BMC-84 surety bond or BMC-85 trust fund.
- Provide documentation of freight broker or freight forwarder liability insurance.
- Fulfill any requirements imposed by the state in which the business is headquartered.
- Register for and participate in the FMCSA's New Entrant Safety Assurance Program.
- Obtain a permanent U.S. DOT registration number.
- Continually maintain and update relevant information on file with the FMCSA.
For a more complete picture of what it takes to open a freight broker business, be sure to read our article on How to Become a Freight Broker.
Note that businesses that operate as brokers or forwarders for marine freight are required to register as Ocean Freight Forwarders (OFFs) or Non-Vessel Operating Common Carriers (NVOCCs) with the Federal Maritime Commission through a separate process. More information is available on the Federal Maritime Commission's website, and OFF and NVOCC surety bonds are available through Surety Bonds Direct.
BMC-84 Surety Bonds and BMC-85 Trust Funds
One thing that freight brokers and freight forwarders have in common is that both types of businesses are required to obtain either a BMC-84 surety bond or a BMC-85 trust fund in order to become licensed by the FMCSA. (Need to refresh your memory on how surety bonds work? Read our article What Is a Surety Bond? for a quick explanation.)
BMC-84 surety bonds and BMC-85 trust funds provide a financial guarantee that the broker or forwarder will follow the law in operating their business. (A BMC-85 is sometimes known as a BMC-85 bond, but this term is inaccurate since a BMC-85 is actually a trust fund.) These surety bonds and trust funds are key to providing security for cargo owners and ensuring that only trustworthy and responsible freight brokers and freight forwarders can enter the market.
How do BMC-84 surety bonds and BMC-85 trust funds work? As part of the process of getting a freight broker's license or freight forwarder's license, an applicant must fulfill one of two conditions:
- Post a freight broker surety bond or freight forwarder surety bond in the amount of $75,000 and submit the surety bond to the FMCSA using form BMC-84. These surety bonds are known as BMC-84 surety bonds.
- Create a trust fund in the amount of $75,000 in an approved banking institution using form BMC-85. These trust funds are known as BMC-85 trust funds, and the freight broker or forwarder cannot withdraw or move the money for as long as the BMC-85 trust remains in force.
BMC-84 surety bonds are a popular option for freight brokers and freight forwarders because they require a much lower up-front expenditure than BMC-85 trust funds. A BMC-85 trust fund requires a freight forwarder or freight broker to allocate $75,000 in liquid capital, which is a significant financial investment for most businesses.
A BMC-84 bond cost, on the other hand, will be lower. That's because a BMC-84 bond only requires the business to pay a premium, which is a small percentage (typically 1.25% - 5%) of the $75,000 bond amount. BMC-84 bonds are an especially smart choice for newer freight brokers and forwarders entering the market, but freight brokers and freight forwarders of all sizes can save money by using a BMC-84 surety bond.
How to Get a BMC-84 Surety Bond
Freight brokers and freight forwarders across the U.S. choose Surety Bonds Direct for cost-effective freight broker bonds and freight forwarder bonds. Surety Bonds Direct works with a wide network of reliable sureties to bring our customers lower freight broker bond prices and a faster, simpler process for getting a BMC-84 surety bond.
Surety Bonds Direct can help freight brokers and freight forwarders obtain BMC-84 surety bonds through this simple three-step process:
- Use our simple BMC-84 surety bond quote form to request a quote. Just fill out some basic information about your freight broker or freight forwarder business, and our experts will find the perfect surety bond for you.
- Surety Bonds Direct will send you a freight broker bond price quote, usually within a few business hours. This is a no-obligation quote that you can accept or decline.
- When you're ready to purchase your surety bond, simply sign the bond paperwork and pay the premium. Our surety bond experts will do the rest, including electronically filing your BMC-84 bond with the FMCSA.
One key fact to remember is that an applicant's credit score significantly affects the premium that the applicant will pay for a BMC-84 surety bond. Surety underwriters look carefully at a business's credit score and financial history, and businesses that have had credit problems in the past will often face higher premiums for BMC-84 surety bonds.
However, Surety Bonds Direct offers options for getting a surety bond with bad credit to help ensure that almost any business can find a BMC-84 bond at an affordable premium. Our extensive network of sureties includes many sureties that specialize in working with businesses with credit problems. We also offer the option to add a co-signer to a surety bond.
When it comes to BMC-84 surety bonds, no one makes it simpler than Surety Bonds Direct. Your business can get started on getting a freight forwarder or freight broker bond right now with our free online BMC-84 surety bond quotes, or call us at 1-800-608-9950 to speak to our surety bond specialists.
Jason O'Leary
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