The automotive industry presents many opportunities for career development and advancement, including the option of being a business owner. As a licensed auto dealer, professionals have the ability to create a profitable business selling new or used vehicles, either in person or online. However, being a successful auto dealer means following a set of rules set out by each state as it pertains to obtaining proper licensing for the business.
An auto dealer license carries many different requirements, including but not limited to the need for an auto dealer bond. This represents a cost to the auto dealership above and beyond inventory, marketing, licensing and insurance expenses.
Licensed auto dealers can take the following steps to ensure the price they pay for an auto dealer bond fits well within their operating budget.
1. Understand Your Credit Score
Auto dealer bonds are provided to licensed auto dealers as a form of credit extended to the business. This credit is not for business expenses but instead acts as a security for the public and the state against fraudulent or illegal activity. If a financial loss occurs due to a failure to comply with state laws, a claim can be made against an auto dealer’s bond. The surety company providing the bond pays the claim amount initially, but repayment by the auto dealer is required.
Because of this structure, surety companies take a close look at credit score when reviewing a new auto dealer bond application. If credit is low because of past missteps, like a bankruptcy, court judgment or tax lien, the surety company may see this as a red flag. To offset the higher risk, the cost of an auto dealer bond is higher for those with less than ideal credit.
Understanding how credit plays a role in bond pricing helps set the stage for the next steps necessary to reduce cost.
2. Improve Your Credit History
Working to improve a credit score helps lower an auto dealer bond expense. Individuals with bad credit should focus on creating a track record of on-time payments, responsible use of credit accounts and avoiding major negatives reported to the credit bureaus. In addition, removing errors from a credit report can boost one’s credit score. These small but essential steps make a significant difference in how much of a risk you pose to the surety company and ultimately, reducing your auto dealer bond cost.
3. Organize Your Business Financials
Another part of a surety bond application is business financial standing. An auto dealer may be asked to provide up-to-date documents such as an income statement, balance sheet or cash flow statement, all which speak directly to the financial strength of a business. Having these documents organized and accurate can bring down the cost of an auto dealer bond.
4. Increase Assets and Reduce Liabilities
Because claims against a bond are repaid by the auto dealer, having enough liquid cash on hand reduces the risk the surety company takes on in approving an auto dealer bond. Dealerships can increase liquid assets by selling additional equipment, refinancing short-term debt into longer-term debts or collecting on accounts receivable. Similarly, reducing the balance on liabilities, like equipment loans, inventory credit lines or other debts can improve the overall financial strength of the business and minimize its risk in the process.
5. Gain Industry Experience
Becoming a licensed auto dealer comes with many opportunities, but individuals with little to no experience in the automotive industry may find getting a low-cost bond a challenge. Lack of experience is also a risk to surety companies, which ultimately may lead to more claims against an auto dealer bond. While this is not a tactic that can be implemented overnight, working toward gaining industry experience as well as education and training may help lower costs when a bond comes up for renewal.
6. Minimize Claims
The intent of an auto dealer bond is providing some level of protection against corrupt business practices of licensed dealers. Customers can claim for compensation if something goes wrong during a sale. However, a history of valid, paid claims against an auto dealer bond is an indication that a dealer may not be operating in line with state laws and regulations. This is a substantial risk to the surety company, and so the cost of an auto dealer bond will reflect this risk.
Auto dealers should minimize claims whenever possible. This does not mean ignoring legitimate complaints or potential claims, though. Work with the surety company to determine next steps for a viable claim, and communicate clearly with customers at every interaction. Staying up to date on auto industry best practices and state guidelines also help minimize claims over time.
7. Select the Right Surety Company
Finally, working with the right surety company is necessary is getting the best-fit auto dealer bond for your business. Strong surety companies work with several different bond providers, even those that offer bad credit auto dealer bonds. With a larger pool of bonding companies, the surety can provide more cost-effective options for auto dealers. Also, a good surety company will have a responsive claims department to help auto dealers work through potential and active claims.
Licensed auto dealers in every state are required to post an auto dealer bond, but the cost of this requirement does not have to be astronomical. Auto dealers who go through the strategies here have a better opportunity to secure an auto dealer bond at a rate that doesn’t break the bank.
Eric Weisbrot – JW Surety Bonds