SURETY BONDS FAQ

Cal-Surety and Your Car Dealer Bond created the Surety Bond FAQ exactly for this reason. We have a deep understanding of the insurance and bond business and enjoy imparting that knowledge to others that have questions!

The issuing governing entity controls whether a dealer bond is mandated and determines the required bond limit. The surety company issues a bond that is signed by their power-of-attorney, stamped with an embossed seal, and then notarized, thus validating it as an official document. Oftentimes bonds are required before business owners can get a license to operate in a certain city or state. It is important to note that the government entity issuing the license is provided the Dealer Bond and activate a claim against the bond if the licensee is not fulfilling the obligations voluntarily.

A Used Car Dealer Bond is a legal contract that guarantees and protects customers. The Dealer Bond promises to provide aid in the recovery of financial loss resulting from dealer fraud or unethical business activity. Most states require motor vehicle dealers to procure a Surety Bond in order to operate legally. The Bond also acts as a line of credit and assists in regulating the Dealer industry.  An Auto Dealers Bond conveys credibility to both current and future customers. The typical participants of a dealer bond are: Obligee - The government entity or individual requiring a “principal” to be bonded. Principal - The primary person who is required to be bonded. Surety - financial guarantor who assures the “obligee” that the “principal” can perform the task. Let our professional and highly-skilled staff support you through the most confusing part of the dealer licensing process. NOTE: The Dealer is responsible for reimbursement of any paid bond claim.

All states have a specific division created to deal with overseeing the licensed vehicle dealers doing business legally. In states like Arizona, this division is called the Motor Vehicle Department (MVD) and in states like California, dealers will recognize the name Department of Motor Vehicles (DMV). The majority of the DMV's require there to be certain protections in place to safeguard the general public (or the retail transactions). That said, not only will a used car dealer bond offer some type of recourse to a buyer who may have become the victim of fraud, but it will also provide protection to other dealers. The transactions done between 2 dealers are called wholesale transactions. The state of California will allow a private-party to sell 5 vehicles per year before they are required to obtain a dealer license (wholesale or retail).

The applicant must be approved by a surety bond company. The bonding company is making a promise to the obligee (the DMV in this case) that the dealer will follow applicable states and federal regulations and pay all their bills. You can apply for your surety bond seamlessly on our website. Regardless of your situation, we feel that you will really appreciate the high level of experience and the deep care we take with every dealer that comes our way.

This is the #1 most common question we receive even though it's actually a DMV pre-licensing test question. The answer is a little complicated but hopefully, this makes sense. There is a carve-out in the law that allows a $10,000 bond for motorcycle-only retail dealers. The only additional exception is made for wholesale-only dealers that are selling less than 25 vehicles per year. All other wholesale, auto broker, or retail car dealers need a $50,000 bond.

Surety bond premiums vary due to the following reasons:

• Surety bond limit ($10,000 or $50,000 in California).
• Credit Score. The Experian Credit Score is what most surety bond carriers will rate your bond based in 2018.
• Application and Financial Credentials. Financials are usually not used for California Car Dealers thankfully.
• Whether you finance or pay in full. We have a payment option for some of our auto dealer bonds depending on the carrier that is writing that surety bond.

Bond premiums can range between 1% and 15% of the bond limit. Complete our quick and easy application today. It's FREE!

The most common reason we see for a high-priced bond is the dealer not having established credit. In this scenario, no credit is basically the same as bad credit. There are a few reasons why folks don't have established credit when they are getting their dealer license. Simply being young and not having loans that have been set up through a bank may be the most common. The other reason that is common with Used Car Dealers is that the individual likes to pay for everything with cash. Some folks buy into the logic that they never want to buy anything that they can't pay for on the spot. While that is a great approach, it doesn't help establish credit. The process of building credit will take some time but getting a credit card with a very low limit can help quite a bit. Buy $25 - $50 worth of items every month and pay the card off within 2 or so weeks of the charges. With about 6 months of this process, you will be in a good position to call your credit card company and ask them to increase your credit limit. Then keep doing the same thing. The fact that you have never been late on a single payment will look great. Also having available credit that you are not utilizing will also improve your overall credit profile. You should see a nice increase in your credit score with this strategy and will be in good shape to renew your bond at a much-reduced cost as your Experian Credit Score improves.

Your Auto Dealer Bond should be active by the time you plan to see your DMV inspector to get licensed. For instance, if you place to the see the inspector on the 3rd Thursday of the month, your bond should be active on that Monday or Tuesday latest. Most dealers like to get the most for their money so they don't want to pay for any dead time but this is strategy could save you as much as a week of time as you will read about in the next question.

The DMV inspectors workloads can vary quite a bit and on occasion. It's usually as simple as that. The inspector will get through more work than they originally had scheduled and have some extra time. Why? Potential dealers often times submit incomplete packages that have to be bypassed. Imagine that you were originally scheduled for a Thursday appointment. But if your inspector has a break in their schedule, they may call you on a Tuesday to come in. This means if you have everything in order, you get licensed 2 days faster. This puts you at the action this week instead of next week!

The California DMV has a very specific carve-out in the law for wholesale-only auto dealers. The exception is meant to offer low-volume, wholesale-only dealers the opportunity to get lower limit auto dealer bonds. As a result, wholesale dealers save themselves some money. This is actually a question on the DMV Pre-Licensing test so most dealers already know this rule but it's worth mentioning given how many times I hear this question. Wholesale Dealers that sell less than 25 cars/trucks per year can get away with the $10K surety bond. The only other carve out exists for Motorcycle-only dealers, regardless of retail or wholesale. Motorcycle-only dealers also have no sales caps in order to still qualify for the $10K bond.

No. The DMV is tracking the number of sales you are making here to determine the limit of the auto dealer bonds for wholesalers. The number of cars you purchased is not factored in. That said, if you are buying too many cars and not selling them, eventually the Board of Equalization (BOE) may start poking around to find out why. Why the BOE you ask? That vehicle was likely was purchased by you (the Wholesale-Only Dealer) and the BOE usually assumes that you will make a profit on the sale of that vehicle. If that vehicle was never sold, the Board of Equalization never gets to collect a tax on the profit you made on the auto sale.

This is very common for businesses that make their money from the vehicles they own will tend to see the benefit of obtaining a wholesale-only license. They get the same auction access and have very little overhead due since they are not dealing with the general public. The trick is not to cut any corners. Again, if you buy a vehicle under the dealer license then that vehicle should be sold to your other business. This allows the BOE to get paid on your profit and the DMV to get paid on the registration of that vehicle. That said, auto dealer bonds will still need to be purchased for $10,000 for those wholesale dealers and will need to be upgraded to a $50,000 bond before they sell that 25th vehicle.

Although the California DMV may be doing away with the Auto Broker designation altogether, Auto Brokers are still mandated to obtain a $50K auto dealer bond. the next question that most Auto Brokers have for me next is simply, why? While I agree that Auto Brokers never buy or sell a car as a Retail Auto Dealer would, they are still materially involved if they helped arrange a sales transaction and got paid for it.

Again, keep in mind the point of view of the Board of Equalization and the Department of Motor Vehicles. They both need to wet their beaks or they will eventually be banging on your door wondering how you could really be a business if you only buy but never sell vehicles. Remember the BOE needs to get paid on your profit and the DMV needs to get paid on the registration of that car (or truck). A good approach is to hold whatever car you like for 6 - 8 months and then sell it. With any luck, you will even be able to scrape a profit in the process. Most people in a position to do this for fun aren't looking to make massive profits from this business model. They are content with just drive a beautiful car around for 8 months before selling it. Then having reconditioning, insurance, and maintenance associated with that vehicle be a business expense before selling it for a profit. Then rinse and repeat!

Since the only carve-out in the DMV law is for Motorcycle-Only Dealers, you will need a $50K bond if you are getting a license to sell vehicles directly to the public. Some of you are searching for the loophole in your mind and there is none. Retail Truck Dealer, Retail RV and Trailer Dealers, and Retail Boat Dealers all need a $50K surety bond.

If you need a bond, we can secure it! Some risks and bond types are more difficult than others but this is all we do and we do it well. Here are just a few of our most frequently requested surety bonds: Motor Vehicle Dealer, Immigration Consultant Agents, Vehicle Registration Services, Car Washes, Vehicle Verifiers, Auctioneers, and Freight Brokers.

A Dealer Bond Rider is for amendments made to the original bond. The most common California bond rider is for changes to the business name or address. When your inspector is requiring a bond rider from you, your current bond is basically inadequate without a modification. Once the proper change is made, the DMV will recognize your $10,000 or $50,000 bond accordingly. Contact our office immediately after learning that a Bond Rider is required.

A bond is going to cover losses or claims that an auto dealer could generate. The possible claimants tend to the be the DMV for incurred fines and late fees that dealers rack up. Dealer customers are usually next up on the list of potential claimants. When we say dealer customers, this includes the public or other dealers. Wholesale dealers that sell vehicles to other car dealers often do so on hand-shakes after a certain level of trust is built. This type of arrangement can lead to claims if that wholesaler gets into a financial pickle. Those hand-shakes are suddenly not worth anything and claims arise. Auto Auctions, banks, and other lending institutions are also another large source of bond claims. These claims happen when DMV dealers default on their loan payments.

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Surety Bond Language required by the DMV:

This is an excerpt taken from the Occupation License Form 25 (aka OL25): WHEREAS, section 11710, Vehicle Code, requires that the Principal file or have on file with the Department a bond in the sum of $50,000 and this bond is executed and tendered in accordance therewith. NOW THEREFORE, the conditions of the foregoing obligation are that if the Principal shall not practice any fraud or make any fraudulent the representation which will cause a monetary loss to a purchaser, seller, financing agency, or governmental agency; and, shall not fail to comply with conditions set out in section 11711, then this obligation is to be void; otherwise, it is to remain in full force and effect. We hope that the Surety Bond FAQ provided by your friends at Cal-Surety and Your Car Dealer Bond was helpful to you.