Auto Dealer Bond Process

A Car Dealers Guide To obtain an Auto Dealer Bond


As the owner of an auto dealership business, you should probably know that purchasing an Auto Dealer Bond is one of the requirements to secure a license and legally operate.

Auto dealers are required by law to obtain an Auto Dealer Bond as a pre-requisite in getting a business license to ensure that they operate within the bounds of the law.

Unfortunately, not all car dealers are aware of how surety bonds work and how they benefit their business. This is because most regulatory government agencies that require them do not provide sufficient information about the issue. It doesn’t matter how many years of experience you have as a car dealer; car dealers must understand what surety bonds are before engaging in such business.

Here are some important guidelines to follow when operating a car dealership:


It is a requirement for obtaining a dealership license

Auto Dealer Bonds are a requirement in at least 47 states across the U.S. before you are granted an auto dealer's license. You can purchase the appropriate surety bonds in the proper licensing agencies in each state that you want to start your dealership business. The states of Ohio, Delaware, and Vermont do not require individuals to post a surety bond when they want to start a car dealership. They simply need to apply for a business license without presenting any form of surety bond.

An Auto Dealer Bond will make sure that auto dealers will strictly adhere to licensing laws and other industry regulations in the conduct of their business. The Auto Dealer Bond will also serve as a guarantee of the dealer’s financial accountability in case the dealer is engaged in any fraudulent activity that is detrimental to its clients or the state.


Auto Dealer Bonds do not protect the dealers

Some auto dealer owners have the wrong notion that surety bonds will provide them protection from any legal claims. While an Auto Dealer Bond provides financial guarantees, it is not an insurance policy that provides financial protection to the holder of the bond.

On the other hand, car dealers, when obtaining an Auto Dealer Bond, are simply buying a line of credit and the Surety firm issuing the bond is saying, “they’re good for it.”

With the line of credit, auto dealers can rely on surety bonds to pay for claims made by clients against the bond in case of reparation arising from alleged unethical business practice and pay for work-performance issues.

Government agencies that require the bond (aka the Obligee) can also file a claim against the bond to collect any penalty or fines, imposed on the dealer for failing to strictly follow the terms of the bond.

However, the auto dealer owner must reimburse the Surety firm the full amount that it paid for.


Auto Dealer Bonds are legally binding

Before signing your signature on the dotted line, it is imperative to understand that surety bonds are legally binding contracts and you are obliged to follow it to the letter. It also means that you have to understand the terms and the details written on the bond.

The terms of the bonds usually spell out your accountabilities and responsibilities, as such, you are responsible for your actions. Depending on the requirement of the state, some surety bonds require car dealers to be contractually obligated to fulfill several tasks dictated by industry regulations.

Some states will require bonds to include clauses that prohibit car dealers from misrepresenting their merchandise, use unethical sales pitches or tactics, provide a valid certificate of titles to any cars sold, or failing to pay the correct taxes/fees to the state.


Failure to renew surety bonds can spell trouble

Surety bonds have expiration dates and must be renewed before their expiration if you want to continue your business or else your dealer license will be canceled.

If you fail to renew your bonding coverage, the government agency that requires those bond/s may impose a penalty against your company.


Surety bonds may not come cheap

Surety bonds do not come cheap for car dealers. It can set you back from several hundred dollars to several thousand dollars.

The cost of a car dealership bond depends on several factors, the size of the shop and your credit history. The better credit scores you have, the better chance of securing low premiums. A person with a credit score of 700 or above gets a rate between one percent and five percent of the bond amount. But if you have a credit score below 700, then you will pay a rate between 10% and 20%.

A car dealer with a good credit score and wants to obtain a $25,000 bond, will pay between $250 to $1,250, while those with poor credit will pay between $2,500 and $5,000. However, in some states, the Department of Motor Vehicles requires at least $50,000 in bonds which would double the amount of premium to be paid.


Final Thoughts

While you may think that surety bonds are a burdensome requirement for auto dealers, it is good for the industry because they guarantee that everyone in the industry will conduct their business professionally. The more clients who trust the auto dealer, the better it is for all the players.

Understanding the ins and outs of applying for surety bonds and its benefits to your business will give auto dealers better sleep at night, less worry, and more business confidence.

Check out this Infographic!

"The Auto Dealer Bond Process."

Auto Dealer Bond Process Infographic
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