Why Your Auto Dealership Should Carry Surety Bonds

Auto dealerships in many states carry surety bonds because they’re required to. Even in states where surety bonds aren’t required, however, dealerships often opt to get a surety bond. If you run an auto dealership, here’s why your dealership may want a surety bond even if it isn’t legally required to carry one.

Auto Dealerships Must Prove Financial Responsibility

The vast majority of states require auto dealerships to provide some form of financial assurance.

This assurance serves to protect both the state that a dealership is in and customers who purchase vehicles from the dealership. Should a dealership fail to pay its sales tax to the state government or not provide a customer with legally required service, the state or customer may file a claim against the dealership.

The dealership’s financial assurance guarantees that funds are available to pay any valid claims. Even if the dealership becomes bankrupt, a measure is in place to ensure that the affected party (whether the state or an individual) is properly compensated.

Depending on a state’s laws, auto dealerships may prove their financial responsibility in one of three ways. They can:

  • Secure a line of credit
  • Purchase a certificate of deposit
  • Carry a surety bond

Of these three options, carrying a surety bond is almost always the best one regardless of whether it’s the only legally permitted one.

Lines of Credit Are Costly and Not Always Available

Lines of credit give auto dealerships a loan that they can borrow against if they face a valid claim from the state or a customer. Although a plausible solution, using lines of credit to provide financial assurance has several disadvantages.

First and foremost, lines of credit aren’t always available to dealerships. They’re awarded based on dealerships’ creditworthiness, and dealerships with poor credit histories often aren’t approved for lines of credit that are large enough to satisfy financial responsibility requirements.

Second, taking out a line of credit limits how much an auto dealership can borrow for other purposes. Businesses can only borrow so much, and any line of credit used to prove financial responsibility will count toward a dealership’s limit. If the limit is reached, loans for inventory, new buildings, and other projects may be unattainable.

Third, should a line of credit be needed to pay a claim, the amount borrowed will generate interest. A dealership will ultimately pay more than the claim, as they’ll have to pay all the interest that accumulates until the borrowed amount is fully repaid.

Certificates of Deposit Take Up Capital

Certificates of deposit are accounts that businesses put money into. The funds then sit in these accounts until they’re needed, and an account’s certificate serves as proof that funds are available.

Certificates of deposit have none of the disadvantages that lines of credit come with, for businesses provide all of the funds themselves. Investing in a certificate of deposit requires capital, however, and the capital invested is money that can’t be used on other endeavors that would grow a dealership.

Surety Bonds Provide Opportunity

Surety bonds provide auto dealerships with the funds they need to prove financial responsibility in exchange for a small monthly payment. At first glance, surety bonds might seem like most expensive of the three options because they’re the only one that comes with a regular payment.

Once opportunity costs are taken into account, though, these bonds are the most affordable way to prove financial responsibility. They don’t use up credit, generate interest payments, or take up working capital. Surety bonds give auto dealerships the opportunities they need to grow.

To learn more about how a surety bond can help your particular auto dealership, contact us at The Service Insurance Company, Inc.