By Mark Montague, Industry Rate Analyst, TransCore DAT.
In December, we reported that the FMCSA had revoked authority of 38 percent of the 21,700 brokers with authority when the $75,000 bond requirement went into effect. Despite the big numbers nationally, things played out differently in the DAT Network. Even though the vast majority of brokers on the DAT Network are small businesses, only a few had their authority revoked, and many of these companies will continue to operate as carriers without a brokerage. I think that attests to the quality of companies in the network.
But, the new bond has imposed additional business costs on brokers, and small brokers are particularly concerned about the effect of the added expense on their business. This all has some carriers wondering: will it affect the rates that we receive?
The premium for today’s broker bond varies, depending on a company’s longevity and credit score, but it typically ranges between $4,000 and $5,500 per year.
So, for a brokerage with annual revenue of $5 million and 10% profit margin, a $5,000 bond payment would reduce its net profit by 1%. For a smaller shop with half that revenue, it would make up 2% of net profit.
That’s a significant hit to their bottom line, but it’s not likely to be enough for the company to attempt raising rates on shipper customers or reducing pay for carrier partners in order to preserve margin. While doing so may help recoup the added cost, straining business relationships is always a tough proposition.
As for the reduced competition among brokers and its effect on carrier rates, it’s my belief that pricing is primarily a function of supply and demand. This was demonstrated in December when load volume hit an all-time high and pushed the national average van rate to its peak for 2013 at $1.95 per mile, according to DAT RateView. In other words, yes, there has been a lot of shifting and consolidation within the broker community, but that hasn’t affected load volume – there’s still plenty of freight to be moved, and that’s what drives rates, along with capacity.
The bigger impact of the broker bond for carriers is on those who had been brokering freight, or considering it. The cost of doing so, even occasionally, is higher now for carriers not only because of the $75,000 bond requirement, but also because carriers are now required under MAP-21 to set up a separate business entity. Doing so could require the help of a lawyer and/or an accountant, among other costs of setting up a separate legal entity.
On the other hand, there may be opportunity for carriers who are in position and willing to start up a brokerage entity since there are fewer “casual” brokers in the market now and plentiful freight. If you are thinking about it, consider the DAT Broker Bond, which is available to DAT customers exclusively.
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Note: This article was adapted from DAT’s blog post on www.DAT.com. It was first published in January 2013