Written By Conway Marshall
Between the manufacturer and your doorstep lie a series of players who coordinate the movement of cargo from creation all the way to its useful purpose. Air, sea, and land carriers handle the physical movement of goods, while others play a more behind-the-scenes role, yet without them, the whole charade would fall apart.
Freight brokers are grease in the wheels who help with smooth movement of shipping for either all or part of a parcel’s journey. Covid has wreaked havoc on the entire logistics supply chain, so brokers and carriers are facing uncertainties and wondering about what to expect in the future. Now more than ever, the BMC-84 bond plays a crucial role in protecting consumers, motor carriers, and other businesses.
The volatility created by the pandemic’s uncertainties forced all business across the globe to revisit operations. In early 2020 Chinese manufacturers grinded to a halt, and when they later revved back up, the steamship lines shipping ocean bound freight found that port labor in the US had disappeared as a result of the domestic shutdown, which created a backlog of ships at the Ports of Long Beach and Los Angeles, among others. The backup continues to this day and some 30+ vessels are currently waiting to unload. Shipping routes have changed and/or disappeared. Critical infrastructure has been repositioned. And containers rates are at historic highs, tripling pre-pandemic rates on some major shipping lanes.
The same has happened with motor carriers who were in high demand before the pandemic and are now even more-so. All of this means that logistics are tight. Problems are magnified and delays are felt down the whole process.
As shipping rates rise, there seem to be fewer problems. The next container can be more valuable and make up for previous issues, and people are generally tolerable of minor issues with long-lasting relationships. Times are good. But good times don’t last forever, so what happens when the backlog clears itself and we return to normal?
Freight rates returning to “normal” is meant to say that they drop. When freight rates drop, every player along the chain makes less revenue and every container or parcel of cargo becomes more valuable. Payment delays create ripple effects that can lead to business failure if a broker or forwarder has not properly accounted for its shipments.
In theory, freight brokers should collect payment up front to have it in hand and ready to distribute to a motor carrier upon timely delivery. But in practice for a good client, a broker will arrange for cargo shipment and collect payment from its client later. Whether or not payment arrives, a carrier expects payment for its services, and if the freight broker does not pay or has gone out of business, the motor carrier might turn to the freight broker’s bond for payment. As rates fall, each shipment becomes more valuable, and motor carriers might not be as willing to wait for a broker’s payment as they would an a rising rate environment, which can lead to claims and financial woe.
The important issue to remember is that as rates rise and services are in high demand, people are willing to tolerate reasonable payment delays because business is good. As rates drop, and business gets tight, payment deadlines become stricter. The $75,000 freight broker bond exists to ensure payment to motor carriers and others, and any claims paid by the surety will lead to bond cancellation. Without a bond, a broker cannot legally operate.
We should appreciate good times, but the law of averages suggests that freight rates will eventually fall back to earth, and freight brokers will be well positioned to have their operations in order to avoid being overleveraged on credit by motor carriers. When the time comes, the motor carriers will not hesitate to turn to the bond for payment.