Owning an auto dealership can be lucrative. Millions of consumers purchase a new or used vehicle every year, and local dealerships are where they turn for help in making their buying decisions.
However, there are expenses that auto dealers incur. Needing a surety bond is one of them.
A dealer is required to have a surety bond to do business in the state where the dealership is located.
The bond comes at a cost, typically ranging from 1% to 10% of the bond amount. Although some industry professionals compare a surety bond to insurance, these tools work independently of one another.
Unlike business insurance, a surety bond is meant to provide protection to the public and an auto dealer’s customers against fraud and corrupt business practices. Because of this structure, successful claims against an auto dealer bond can wreak havoc on the profitability and sustainability of a licensed auto dealer.
Surety bonds are a contract between the surety company providing the bond, the auto dealership as the principal. When a customer successfully files a claim against a dealer’s bond, the surety company pays for the claim on behalf of the dealership.
However, the dealer is required to repay that claim amount. Think of the bond as a form of extended credit.
Because of this, a valid claim against a bond costs the auto dealer money. Claim amounts can vary, but significant payments by the surety company ultimately fall on the shoulders of the auto dealer. Multiple claims, large or small, add up to a substantial financial burden to auto dealers.
Getting a New Bond May Cost More
In addition to paying for successful claims, dealers may then also face challenges in getting a new bond in the future. As part of the licensing process for starting or maintaining a dealership, auto dealers must acquire a bond and ensure it is renewed each year. The renewal process involves taking a close look at factors that drive bond costs, including:
•Personal credit history
•Past claims track record
If any of these aspects of an auto dealership are less than ideal, the cost of a new or renewed bond will be higher.
A Reputation Hit
Most importantly, claims against an auto dealer bond can create a reputation problem. A claim means a customer felt as though their business transaction in either buying or selling a vehicle did not meet industry standards, or it was fraudulent in some way.
Multiple claims against a surety bond may indicate the dealership is not operating in a correct manner. This ultimately leads to customers going elsewhere. Over time, fewer customers means less profit, and that can result in a dealership closing its doors for good.
How to Avoid Claims
Dealerships should work diligently to avoid claims against their surety bonds whenever possible. This does not mean ignoring customer complaints, however. Instead, licensed dealerships should work with their surety bond company to resolve a potential claim as best as possible.
A strong surety company offers support not only in obtaining a bond but also in managing the claims process to keep both the claim amount down and the customer satisfied.
Dealers should also communicate effectively with potential and current customers, providing detailed information about transactions. Communication comes into play when explaining financing, features of the vehicle being sold or warranties that may be offered. (Wards Industry Voices contributor Eric Weisbrot, left)
Providing this clear, detailed information from the start with every customer can stymie claims and help keep the dealership profitable.
Eric Weisbrot is the chief marketing officer of JW Surety Bonds.