In the transportation industry, you may have come across a broker who, for whatever reason, was unable to pay out their invoices. In this instance, the broker is in jeopardy of having their bond canceled or it might have been canceled already. As a carrier or as a party who has a claim on that bond, what is the best way to handle that situation? What protections or options do carriers have if a broker’s bond has been canceled?
Importance of a Bond
There are two main types of bonds for brokers:
- Surety Bond
- Trust Fund Bond
Both bonds allow brokers to operate their business and arrange hauls between shippers and carriers. Once a broker has a valid bond and brokerage authority, they are free to operate their business.
However, if the broker does not pay out all their invoices within the agreed upon time frame, it will cause the carrier to file on the broker’s bond for delinquency.
Once the carrier makes the request to file on the bond, the brokers will be contacted by their bond company and made aware of the claim. At this point, the broker has a set time frame to pay the carrier their delinquent payment.
If the carrier is not paid within a set time frame, the bond company will allow the carrier to file on the bond. From this point, the broker will have a 30 days grace period before their bond is canceled.
However, during all this back and forth, the broker can still be booking loads even if they have delinquent invoices and a bond that has been filed against. Some brokers will pay out their accounts and the pending cancellation will be removed, but others could just continue to book loads until their bond is canceled.
What Happens When a Bond is Cancelled
Once a broker’s bond has been posted as canceled, they are still able to book loads until the cancellation date (30 day grace period). We would caution any carrier thinking of hauling for brokers during this cancellation period, as there is usually a good chance the broker will go out of business and you will essentially be working for free.
If the broker does go under after neglecting to pay on delinquent invoices, then the bonding company will be responsible for paying out all the claims that have been filed on the bond.
The bonding companies typically wait around 90 days to allow all claims to be filed on the bond in question and then will pay out. However, broker’s bonds are only worth $75,000 and each claim will only get a percentage of that amount, so you may not be able to recoup your losses even if you file on the bond.
Three Options to Receive Payment from a Broker with a Canceled Bond
So, knowing this, how do you try to recover payment after working with a broker whose bond had been canceled? In this scenario, you basically have three options:
- File on the bond and make a claim
- Send a Demand for Payment Letter to the Shipper of the loads you hauled
- Send the delinquent invoice to a collection agency or sue
However, none of these options guarantee you will be able to recover your losses from the broker or the bonding company.
This is where working with a factoring company is beneficial, for two reasons. First, a factoring company like UC Factors will have the knowledge and expertise to help you pursue payment directly from the shipper and file on the broker’s bond.
Having a perfected BOL will assist in the demand process of collecting from a shipper. UC Factors encourages their clients to create their own bill of lading for every transaction (even if you also have paperwork from the shipper or broker) which will serve as contractual proof to seek payment from the shipper or consignee.
The second way a factoring company can help actually occurs before you even enter into business with a broker. Since a part of working with a factoring company includes credit checks on businesses you enter into transactions with, a factor will be able to run checks on brokers as well as verify the status of their bond before you haul for them on the FMCSA website.
They can also view if a broker’s bond has been revoked and reinstated even if the broker’s bond is currently valid. This will be a red flag to a factor and should be to you as well since it shows that the broker has had difficulty making payments.
In this case, the factor will be highly aware of the amount of credit they extend because they don’t want to end up working with a broker who will default on payment.
We recommend you work with a factor who looks further than if the broker’s bond is valid or not. Some factors will only check if a broker’s bond is valid and not go further to determine the actual stability of the broker’s business.
When the factoring company does not take the time to delve a little deeper, they could potentially be putting their clients at risk by not getting the full picture of the broker’s business status.
Even if you do not work with a factoring company, we still recommend you take the time to investigate each broker you work with to ensure that their bond is valid and their business is stable. This could save you from having to pursue payment from a delinquent broker or file a claim on a bond where you will not see the full amount of money back.
How to you choose a factoring company who will have the knowledge and expertise to help you pursue payment in the case of a canceled bond? Learn how to choose the best factoring company for you in our free guide: