When people purchase vehicles, they need to be able to trust the dealers. Customers expect dealers to be honest with them about the vehicles they offer for sale, and the government trusts that the dealers will comply with the law and remit their taxes on time. If you want to be an auto dealer, you must work to earn trust to succeed in your business. 
While the rules vary from state to state, people who want to sell more than a few cars for profit each year are generally required to obtain auto dealer licenses and get bonded. An auto dealer bond is a cost of doing business and is something that is a licensing requirement. If you are required to get a dealer's license, you should expect to have to secure a bond. Here is what you need to know about auto dealer bonds. 
Understanding Auto Dealer Bonds
State governments require auto dealer bonds before people can secure dealer's licenses. Since you can't operate a dealership without obtaining a license, this makes getting bonded a necessary step for starting a business as an auto dealer. 
While some people confuse dealer bonds with insurance, they are different. Instead of protecting you against claims filed against your business, surety bonds protect your creditors, customers, and the state licensing authority where you operate. When a claim is filed against your bond, you will have the ultimate responsibility of paying it. 
An auto dealer bond is a form of credit extended by a surety company and is a contract that involves the following three parties:
• Principal – The dealership or individual dealer seeking the bond
• Obligee – The licensing body requiring the bond
• Surety – The bond company issuing the bond as a guarantee of the principal's legal compliance and contractual performance 
At the time a bond is issued, the surety will require the principal to sign an indemnity agreement. Under the indemnity agreement, the principal will agree to hold the surety harmless for any claims that might be filed against the bond. This means that if a valid claim is filed against your bond, the surety company will pay it. However, you must fully reimburse the surety for all amounts paid or face legal liability. If you lose your bond because of failing to meet your obligations or breaking the law, your dealership could be closed because losing your bond also can result in losing your dealer's license. 
Why Auto Dealer Bonds Are Required
Auto dealer bonds are required to protect consumers against fraud that might be committed by dealerships, their employees, and individual auto dealers. They also protect the government by ensuring you will comply with the law and pay your tax obligations. Since bonds are not permanent and must be renewed, the bond requirement also allows the government to confirm that dealers continue to operate their businesses ethically and in compliance with the state's laws.
Who Must Get an Auto Dealer Bond?
If you operate in a state that requires auto dealers to be licensed, you are likely to also have to secure an auto dealer bond as a licensing requirement. States won't issue dealer licenses until and unless the prospective dealers have the required bonds. While state laws vary about who is required to secure an auto dealer license, the general requirements include people who sell between two and six vehicles each year for profit to become licensed auto dealers and purchase bonds. 
The following are examples of dealers who must get bonded to obtain licenses in most states:
• Franchise dealers
• Salvage vehicle dealers
• Individuals who flip more than the threshold number of vehicles for their state per year
• Used auto dealers
• Auction vehicle dealers
• Motor vehicle dealerships
• Wholesaler dealers
• Recreational vehicle dealers
Some states only require used car dealers to purchase surety bonds. There might also be different required bond amounts for different types of auto dealer licenses in some states. 
What Is the Bonding Process?
You can apply for an auto dealer bond through a surety company. Getting approved is not automatic, however. Since a surety company will be taking on risk if it approves your bond application, your application will be sent through an underwriting process. The underwriters will evaluate you based on multiple factors before they approve your application. Some of the factors that surety companies consider include your credit score, experience, available working capital, reputation, and others. 
If you are approved for an auto dealer bond, you will have to pay a bond premium ranging from 0.5% up to 10% or more to secure your bond. This premium must be paid upfront, and the rate you will be quoted will be based on the degree of risk the surety company believes you pose as determined in underwriting. 
If you have an excellent credit score and substantial experience, you can expect to receive a low rate quote. On the other hand, if you have poor credit, a spotty record, and little experience, you might either have to pay a higher rate or have your application denied. 
The Importance of Avoiding Claims Against Your Bond
Once you secure your bond and license, you should do everything that you can to avoid bond claims. To avoid claims being filed against your bond, make sure that you always follow the laws of your state and operate your business honestly and ethically. Some of the types of conduct that can result in bond claims include the following:
• Failing to file and pay your taxes on time
• Not honoring warranties
• Odometer tampering
• Misrepresenting a vehicle's condition
• Failing to deliver the title of a purchased vehicle to the buyer
• Buying or selling stolen cars
• Failing to report vehicle sales
• Failing to remit sales taxes 
• Engaging in other illegal activities in the course of business
If you want to open a business as an auto dealer, you should anticipate being required to obtain an auto dealer license and a surety bond. After you secure your bond and license, make sure to adhere to your bond terms and the law to avoid potential bond claims and the loss of your bond. If you lose your bond and license, you will not be able to legally operate your business.

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