Everything Car Dealers Need to Know About Auto Dealer Bonds

November 13, 2022

Team ACV




Everything Car Dealers Need to Know About Auto Dealer Bonds

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A auto dealer going through the process of securing an Auto Bond

Auto dealer bonds are a necessity when getting a car dealer license, but there’s a lot to learn along the way. Read our guide to understand what an Auto Dealer Bond is, what you need to know before you begin the process, and how to get started. Find out the purpose of auto dealer bonds, what they cover, and more. 

What is an Auto Dealer Bond?

Auto dealer bonds, motor vehicle dealer bonds, and car dealer bonds are the same. They are all surety bonds required by the government, which must be purchased before you get a dealer license. They exist to protect the public from fraudulent dealers and violations of licensing law. The surety bond needs to remain active so long as the dealer is doing business in the car trade. 

What type of Auto Bond does my Dealership need? 

The type of dealer you plan on being will dictate which Auto Dealer bond you will need. We will outline each one, focusing on the common types of car dealers: Franchise, Independents and Wholesale. 

Franchise Dealerships

This type sells new cars via an agreement with the manufacturer, like Ford, Chevy, or Honda. Since Franchise Dealers usually sell new and used car inventory, people often think they would need multiple bonds since they carry both new and used cars. However, this is not always the case, as in some states, a single bond covers both the new and used aspect of  franchise dealers.

Independent Dealerships

These dealerships sell used cars. Nearly all states require a surety bond for independent used car dealerships.

Wholesale Dealerships

Those who sell  dealer to dealer need a bond too, even though they don’t sell directly to consumers. They typically require the same bond as any other dealership, but in some states, like California, there is a separate bond for wholesale dealers.

What does an auto dealer bond cover?

The bond exists to protect customers and the state in case the business owner puts either of them in financial danger. For instance, if a dealer owner commits fraud, their customers can file a claim and be reimbursed from the bond. As a dealer, you will then repay the bond issuer from your own capital. The bond acts as an assurance that you will follow the state laws that protect consumers when buying automobiles. 

The cost of an auto dealer bond

Bond cost varies and is determined by several factors. States require bonds to cover differing bond penalties. The premium, or the amount that you pay for the bond, is a percentage of the whole amount set by the state: 

  • If you have a good credit score, the percentage can be as low as 1-3%. 
  • Dealers who have already been in business for a number of years can even get a percentage below 1% in some cases. 

A bond premium tool can help you estimate a more precise cost for your dealer bond. 

Is financing available on auto dealer bonds?

Not everyone is able to pay for a dealer bond in full at the time of licensing. In this case, you’ll want to look into financing. Many bond companies work with lending companies to offer this option. Then, you can pay the cost of your bond over the course of months with a lower monthly payment. After you receive a bond quote, you can then request additional information about financing options. 

Is a credit check required to get an auto dealer bond?

Generally speaking, yes. One of the duties of surety underwriters is to review the personal credit of potential dealers to decide whether they are eligible for a bond and to determine their rate. It’s most common for surety underwriters to use a “soft” credit check so the process won’t affect your credit score. The credit score is the most significant factor in determining eligibility for a dealer bond, although other factors also come into play. 

What information is collected for an auto dealer bond?

The surety underwriter will collect other information in the process of determining a potential dealer’s eligibility. The information they need includes the legal name of the dealership, including the “doing business as” (DBA) name if it is different, the address of the business, the phone number, the number of years in business, and the owner’s name, address, and Social Security number. 

For larger surety bonds, over $50,000, underwriters will also review the business’s financial statements. They are looking for adequate financial liquidity and a recent history of profits.

How does an auto dealer file their bond?

Once the dealer has been approved for and received a bond, they must file it with the appropriate licensing authority. In most states, the bond is filed by mail and requires the surety company seal when it is filed. 

Which states require dealers to purchase a dealer bond?

Every state and the District of Columbia require dealers to purchase an auto surety bond. There are variations in which types of bonds are required beyond the initial dealer bond itself, but all states require them in some form. Specific state guides are available on our site. 

ACV can help source your dealership with inventory 

Getting your dealer bond is just one step on your path to becoming a dealer. Once you have obtained your auto dealer bond and you have secured your dealer license, check out ACV Auctions to start sourcing your dealership with fresh used inventory

We have plenty of used car inventory for every type of dealership and customer. Plus, you will benefit from the convenience we offer; our auctions are 100% online, so you can source inventory right from your phone or desk. 

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