Freight Brokers vs. Freight Forwarders: What Truckers Should Know
Freight brokers and forwarders play crucial roles in the trucking industry. Both coordinate freight transportation for third parties, connect shippers to carriers, negotiate rates, and ensure deliveries arrive on time. However, while freight brokers connect shippers and carriers but do not take possession of the freight, freight forwarders take possession of the cargo that will be shipped and might pack and ship it. Freight forwarders have greater responsibility for the cargo they manage than freight brokers do. If you are a truck owner-operator thinking about adding freight brokering or forwarding to expand your business, here is some information that you should know about freight brokers and freight forwarders and their differences.
Differences Between Freight Brokers vs. Freight Forwarders
Freight brokers connect shippers and carriers to arrange for goods to be transported. Typically, freight brokers do not take possession of goods but manage how they are shipped. Most freight brokers do not handle international shipping or only handle it within a specific area, including between specific regions of the U.S. and Mexico or the U.S. and Canada.
By contrast, freight forwarders have multiple additional responsibilities, including the following:
- Providing freight storage
- Assembling shipments
- Consolidating shipments
- Managing international shipments
Since freight forwarders take possession of freight, they also have legal liability if something goes wrong. Some more details about each of these roles are provided below.
What Is a Freight Broker?
Freight brokers facilitate the shipments of goods and connect multiple carriers with shippers. This allows them to negotiate better shipping rates since they work with multiple carriers. Brokers work with a high volume of shipping and work with multiple clients, providing them with greater negotiating power as compared to businesses with a few clients. Brokers also arrange shipments on behalf of multiple shippers, so they can offer trucking carriers a steady stream of business so that trucking carriers can keep their trucks loaded and on the road.
If you want to become a freight broker, your job will involve more than simply connecting shipping companies and trucking carriers. You will also be responsible for the following tasks:
- Monitoring shipments
- Tracking shipments
- Negotiating lower rates
- Tracking regulatory changes, fuel rates, and freight rates
- Notifying shippers and carriers of changes and trends as they occur
- Facilitating communication between shippers and carriers
- Examine route changes to improve efficiency and safety
As a freight broker, you will earn commissions based on the total value of the shipments you manage.
Understanding Freight Forwarding
Like freight brokers, freight forwarders also connect shippers and carriers to arrange the transportation of goods. They normally do not own trains or trucks used to transport goods but help to prepare and ship cargo. They play a more active role in the shipping process. Freight forwarders might offer a broad range of services, including packaging, storing, and consolidating shipments of goods. They also might prepare paperwork for customs and ship under their own house bills of lading.
Federal Motor Carrier Safety Administration (FMCSA) Registration Requirements
The FMCSA requires freight brokers and freight forwarders to register and apply for special licenses before they can legally operate in the U.S. Registration involves several steps.
You will first need to figure out the types of operating authority you need based on the types of cargo your business will handle. You will then apply for all of the required credentials through the FMCSA’s Unified Registration System. Before you can become licensed, you will need to purchase a BMC-84 bond or provide documentation that you have established a BMC-85 trust fund.
When you apply, you will also need to show that you have purchased appropriate liability insurance coverage as a freight broker or forwarder. Make sure to check with the state in which your business will be headquartered to meet any state requirements in addition to the federal requirements. You will need to register for the New Entrant Safety Assurance Program with the FMCSA and participate in it and apply for a U.S. Department of Transportation registration number. Once you have received your license to operate as a freight broker or forwarder, you will need to maintain your BMC-84 bond and ensure that you update the information you have on file with the FMCSA.
If you will broker or forward marine freight, you will need to register as an ocean freight forwarder (OFF) or a non-vessel operating common carrier (NVOCC) through the Federal Maritime Commission. This process is separate and requires you to also secure an OFF surety bond or an NVOCC surety bond in addition to a BMC-84 bond or BMC-85 trust fund.
BMC-84 Bonds and BMC-85 Trust Funds
A key requirement for becoming licensed through the FMCSA to operate as a freight forwarder or freight broker in the U.S. is to purchase a BMC-84 surety bond or establish a BMC-85 trust fund. Both the BMC-84 bond and the BMC-85 trust fund provide financial guarantees that you will comply with the law in your business operations.
Most freight brokers and freight forwarders choose to purchase BMC-84 surety bonds instead of establishing BMC-85 trust funds. Purchasing a BMC-84 bond requires you to pay a small percentage of the maximum bond amount upfront. The required bond amount for a BMC-84 surety bond is $75,000. You can also decide to establish a $75,000 BMC-85 trust fund at a banking institution. However, if you opt to do this, you will have to pay the entire $75,000 upfront into the trust fund account, and you will not be able to access the money as long as your BMC-85 trust fund remains open.
Since establishing a BMC-85 trust fund requires you to place $75,000 in liquid assets in the account, most freight brokers and forwarders instead choose to purchase BMC-84 surety bonds. Instead of paying $75,000 upfront, you will only have to pay a small percentage as a premium upfront. The percentage will range from 1.25% to 5% of the bond amount, depending on your credit, business experience, moral character, and other relevant factors.
If you are a trucker and are interested in expanding your business by opening a freight brokering or forwarding division, make sure that you understand all of the requirements of both the FMCSA and your state. Once you secure a BMC-84 bond, you will need to make sure that you maintain it to keep your license to operate. If you maintain a good relationship with your surety company and avoid claims against your bond, you might enjoy even lower bond rates in the future.