Editor’s Note: This is a guest blog from Lance Surety Bond, a provider of freight broker bonds, among many others. Cerasis holds a $250,000 freight broker bond, and all 3PLs who handle transportation management must have a freight broker bond in order to do business. You might wonder, why are we talking about anything to do with acquiring or making it easier to acquire a freight broker bond? We fully believe that if we can help anyone get into the business, even if they are competitive to us, in the RIGHT way, it helps the industry overall. For years, freight brokers and transportation intermediaries have had somewhat of a black eye as there have been many players in the space who have done shippers and vendors wrong. At Cerasis, we want to be ahead of any bad business in the industry and so we want to offer the best information to make the best industry possible. We hope you find this post helpful.
Whether you’ve just set up your freight brokerage, or you’ve been operating for years, you know you need to obtain a freight broker bond to operate legally. As one of the main prerequisites for getting licensed, the bond is a considerable yearly expense, especially since its increase to $75,000 in 2013.
That’s why it’s important to check whether your freight broker accounting strategy is optimized, to show your business in the best light when you’re applying for a freight broker license bond and to deter increases in the freight broker bond cost. If you’re wondering why, just consider the way a bond premium is determined.
When a surety provider reviews your application, it will take into consideration a variety of financial and business factors, so that it can estimate your liquidity and stability. These include personal financials and credit, industry experience, business financials and cash on hand. After all, a bond is like an additional line of credit to your business, guaranteeing your ability to follow the law and act according to contractual obligations.
To help you get the best deal on your bond premium, here are four sneaky accounting errors that you should avoid. They can make your brokerage look less financially stable than it is, thus increasing your freight broker bond cost unnecessarily.
Too many liabilities before applying
One of the most important factors that sureties examine in bond applicants is their personal credit score. When a bonding company writes a bond for you, they are financially liable in the event that a valid claim is filed against you. Thus, the bonding process is similar to the way banks check your credit history when you apply for a loan.
That’s why not covering your liabilities before applying for a bond is an accounting error that you should address to decrease your bond cost. Finalizing previous credit payments and any other outstanding liabilities and generally making the best to increase your credit score are effective ways to present your business in a safe and stable perspective to bond underwriters.
Failing to total your assets
Your overall financial status, and the profitability of your business, are both important determining factors in the formation of the freight broker bond cost. If you’re not able to showcase your assets, the surety can consider it riskier to underwrite a bond for you.
Often the easiest way to escape this situation is to work with a certified public accountant (CPA), who can consult you and prepare your balance sheets and income statements. This way, you can avoid unnecessary mistakes if you’re not trained in finances. Furthermore, review statements or compilations prepared by your staff are not considered solid proof by sureties. Audits done by CPAs, though, are seen as more secure and thus acceptable to show your assets and general business status.
Lack of steady cash flow
Another common factor considered by sureties when assessing your business is your cash flow status. While you might be trying to minimize cash on hand, the right cash flow is worth the taxes. The reason is that If you’re not able to demonstrate a healthy level of cash flow from operating, investing and financial activities, you might raise doubts regarding your liquidity.
As previously stated, working with an accountant and obtaining proper financial statements is a good way to avoid this mistake. In some cases, you might be specifically asked by the surety to provide a financial statement audit by a CPA that was mentioned earlier. This means that a statement of cash flow will be included there, thus guaranteeing your ability to maintain your ongoing financial operations. Showcasing your bank line of credit is also helpful, as it demonstrates you will be able to cope with cash flow deficits.
Failing to demonstrate good financial management
Besides the actual numbers on your statements, sureties look at the general management patterns in a freight brokerage to predict whether it’s being run in a sustainable way. If you don’t manage to demonstrate that a sound financial management strategy is in place, you might be perceived as a riskier applicant.
To address this potential error, you can again look into providing detailed papers. Within the financial statements that a CPA can prepare for you, a schedule of general and administrative expenses is included. It’s often used by sureties to estimate whether overhead expenses are managed and followed thoroughly. Along with the rest of your documents, this can be treated as a positive sign that can lower your bond cost. Don’t underestimate the value of this little document; demonstrating good money management in your everyday business expenditures can really pay off in a surety provider’s eyes.
By avoiding these accounting errors, you can present your business in the best possible way and decrease the freight broker bond cost. It’s all about providing enough proof to the bond underwriter that you are not a high-risk applicant.
What’s your experience with freight broker accounting? Do you have a strategy for avoiding any of these pitfalls? Please share in the comment section below.