Across franchise and independent auto dealers, more than 36,000 new and used dealerships exist today. Throughout these businesses, many auto dealers understand the importance of having a surety bond in place as it is a requirement for having an auto dealer license. However, most fail to think about their auto dealer bond until it is too late – that is, when a claim is filed against it. Understanding your auto dealer bonding as well as how claims can derail your business success are crucial to keeping the dealership doors open and customers coming in.

An auto dealer bond is a necessity for nearly all licensed auto dealers, whether selling new or used vehicles. Auto dealer bonds vary from state to state as far as the type of bond needed, the amount, and the price of the bond, but one thing remains constant. Auto dealers are required to have a bond in place because it provides certain protections for customers. If a dealer fails to abide by its state regulations or laws and customers are harmed in the process, a claim against the bond can and likely will be made.

Understanding how an auto dealer bond works in practice helps professionals in the industry stay ahead of the curve in terms of managing claims and protecting their business. It can be challenging to do so, however, with ever-changing industry regulations, when switching surety agencies, or when an inaccurate claim is made. The best step for auto dealers is to recognize the impact claims may have against them, and how their surety agency can help throughout the process.

As with any business in any industry, there may be customers who file claims that have no merit. In these cases, auto dealers need to work with their surety agency to get to the bottom of the claim and have it dismissed or otherwise handled before it becomes an issue. However, when claims are legitimate, due to an auto dealer’s bad business practices, they have a significant impact on the business.

Auto dealer bond claims not only have a negative impact on your reputation, making it more challenging if not impossible to get new customers, but they also influence the cost of doing business in different ways. First, auto dealer bond claims that are found to be accurate are initially covered by the surety agency – that’s the reason the bond is in place. But dealers must repay the claim amount at some point in the future. This can represent a significant cost to the business.

In addition, auto deal claims that result in a payment to a customer or organization such as the state impact the dealer’s claim history in a negative way. When it comes time to renew your required auto dealer bond, you are likely to pay much more for the price of your bond, even if the amount has not changed. This is because surety agencies are extending a form of credit to you with a new bond, and when that credit is used because of a claim, the cost of your next bond goes up. This additional expense, combined with repayment of previous claims, can derail your financial footing as an auto dealer.

Auto dealer bonds are required as part of doing business in the industry for a reason, and in most cases, the cost of purchasing a bond for your dealership will not be prohibitive. However, to ensure that cost continues to stay at a manageable level, working with the right surety agency is a must. Be sure to find a surety company that understands the auto dealer business, offers tools and resources to help you manage your surety bond and claims, and provides access to claims specialists that know how to handle claims, legitimate or otherwise, when they come.

Having the right surety agency on your side limits the potential for closing the dealership’s doors due to claims over the long-term, and it keeps the cost of your auto dealer bond affordable each renewal period.