What is a Motor Vehicle Dealer Bond?

Buying and selling cars is a high-stakes transaction. These deals must occur within the boundaries of the law. If someone tries to sell a car illegally or dishonestly, they could face criminal charges. No one has more responsibility to conduct a transaction correctly than a dealership.   

Running a dealership is about more than selling cars. If you fail to carry the work off correctly, you could place buyers in a very uncomfortable position. To address their losses in these cases, then you might need a dealership surety bond. What are these? How do they work?  

What is a surety bond?  

Surety bonds, like insurance, are contracts that a business buys to prove they have the means to take responsibility for their mistakes. However, these bonds are not insurance proper.  

With an insurance policy, you prove financial responsibility with the financial help provided by the policy. If you make a claim on your insurance policy, then it will pay most of the costs related to the claim on your behalf. Surety bonds are a bit different in that they do not pay on your behalf. They simply guarantee that you will repay someone if your negligence causes them a loss.  

 If you enter a contract in any line of business, then the client you work for will expect you to do your work correctly. You might fail to do so, however, for various reasons. Still, regardless of the cause, the resulting loss might harm the client. Because the loss resulted from your failure to complete the work, you might have an obligation to compensate them. A surety bond will act as the guarantee that you will do so. That’s why many contracting clients require contractors to purchase specific bonds. 

Bonds involve three parties: 

• Sureties – These are the companies that issue surety bonds to applicants.  
• Principals – The business that buys the surety bond for itself is the principal.  

• Obligee – The third party or customer that requires and benefits from a bond is the obligee. 

 So, if you cannot complete your services owed to a client, then that person (the obligee) might qualify to file against a bond. They will make the claim through the surety. In some cases, the surety company will pay the affected party directly. In other cases, the principal business will have to pay the obligee themselves. If the surety company pays on behalf of the principal, then the principal will have to repay the surety.  

Why do car dealerships need surety bonds? 

 The simple line is that surety bonds are guarantees that you will do your job correctly. As a car dealership, you must make sure that all transactions go off correctly. A failure to do so could put clients and others, including financiers, in jeopardy. The blame could fall onto the dealership.  

 Suppose that, for example, you own a dealership and employ numerous salespeople. One of these salespeople does not follow the appropriate regulations set by law. One of the used cars they sell to a client has a defect, and no one discloses that to the buyer. Your company’s misrepresentation might expose them to significant risks. The coverage provided by a surety bond, however, can help them recoup that money.  

 By investing in a dealership bond, you can build a great deal of trust in your in your dealership. Those that have these bonds can use them not only for their intended purposes, but also as guarantees of trust. Clients and others who know that your business has a bond might be more likely to work with the company. As a result, your reputation might improve, and you’ll be known as as a business that does their work honestly. Not only that, if problems do arise, then you will have a resource available to help you fix the problem.  

Getting the Correct Bonding for Your Dealership 

 Given the critical nature of the industry, most states require auto dealers to buy surety bonds. Texas is no exception. Dealerships must obtain a bond worth at least $25,000. The bond must remain valid for at least two years, and you will file the bond with the Texas Department of Motor Vehicles.  

 Though you must have at least $25,000 in bond coverage, you can choose to increase this amount. The types of cars you sell, along with the amount of transactions you make and the size of your business will usually influence how high you want a bond to be.  

 You will have to pay a regular premium to keep the bond active. Even if you have to increase your bond amount, you can usually keep your bond’s premium affordable. However, this is a separate cost from the bond amount. Most bond companies usually charge only a small percentage of the bond amount as the premium. So, even though you have a bond worth $100,000, you will likely only pay a small portion of this for the premium.