Want To Open A Car Dealership? 3 Surety Bond Questions Answered

Posted on: 6 October 2016

Whether your have always dreamed of opening an auto dealership due to a love of cars or you have just recently begun considering it due to the great money you can earn selling cars, you need to know all the steps to becoming a legal, licensed auto dealer. One important step in the process of opening your dealership (unless you live in Ohio, Vermont, or Delaware, which don't require them) is obtaining an auto dealer surety bond. Read on to learn the answers to three questions you may have auto dealer surety bonds that will help you understand what they are all about and how they work. 

1. Why Are You Required To Obtain a Surety Bond?

While many believe auto dealers are only required to obtain surety bonds to protect consumers, the truth is that it protects your business as well. Unfortunately, auto dealerships are the target of more customer complaints than any other type of business. This may be due to the fact that while used auto dealers try their best to make sure customers know every fact about a vehicle they need to before they decide whether to invest in it or not, there is no definitive way to make sure that a car being sold will not unexpectedly begin developing problems, even if it appears to be in great shape when sold. 

When you have a surety bond, the company that issues your surety bond is alerted to any consumer complaint filed against you. Then, instead of you having to pay for a lawyer and take time out of your life to battle the consumer in court, you instead just provide all the facts behind exactly what the customer is complaining about to the surety bond company, a place like NFP, P & C, Inc. Your surety bond company then takes over from there and determines whether the consumer complaint is valid or not. 

If the company determines that the consumer complaint is not valid, then the complaint is dismissed and you owe nothing to the consumer or to the issuer of your surety bond. If the issuer of your surety bond determines that the complaint is valid and the consumer is due reimbursement for car repair expenses or any other expenses they incurred due to your error, then the surety bond issuer immediately pays the consumer, so you don't have to worry about immediately coming up with the cash to pay them. 

However, when the surety bond issuer does find that the consumer has a valid complaint and reimburses them for any expenses they incurred, such as unexpected car repairs they paid for after purchasing it from you, you do have to pay the surety bond issuer back. Thankfully, the agency will typically reason with you to create a payment plan that works well for you and won't place you in economic hardship. 

2. How Much Bond Coverage Do You Need & How Much Does it Cost You?

Now that you know what an auto dealer surety bond is for and how it can help you as well as your customers, you likely wonder just how much coverage you need. The answer is that it not only varies widely depending on the state your dealership is in and the type of vehicles you plan to sell, but in some states, also on a case by case basis. However, to get a general idea of how much coverage is needed, common coverage requirements include $25,000 and $50,000 in some states. You can find out the requirements in your state by contacting the DMV.

How much of the total bond coverage do you need to pay? The surety bond fee varies from issuer to issuer, but the fee you pay typically depends highly on your credit score. New dealers with very good credit often need to pay as little as 5 percent of the total bond or less, while dealers with average or poor credit typically must pay up to 20 percent of the total bond coverage. However, some surety bond issuers do allow new auto dealers to set up payment plans for their bond fee, so don't think your dream of opening an auto dealership can't come true if you have poor credit and don't have enough business start-up funds to pay this amount in full. 

3. How Can You Protect Yourself From Surety Bond Claims?

While the number one way to protect your dealership from surety bond claims is to make sure you follow every law in your state that governs the activities you perform daily as a vehicle dealer, the truth is that unexpected problems can occur with vehicles after they are purchased. Naturally, consumers are prone to suspecting the auto dealer knew about the problem when the problem may not have started until after the consumer purchased the vehicle. 

For that reason, it is very important to have great customer service and, when a customer complains, try to work out a solution with them that leaves them satisfied without taking a huge toll on your business expenses. 

To protect yourself from false consumer complaints, always save consumer contracts and document everything that goes in in your business on a day-to-day basis. When a false complaint is filed against you, the best way to fight it is by providing evidence that the claim is false. 

If you are thinking of opening an auto dealership soon, then unless you live in one of only three states that don't require them, you will need to get an auto dealer surety bond before you can obtain your auto dealership license. Now that you know the basics about surety bonds, you can get details about exactly what yours will cost and how to obtain it by contacting a company that offers them.